2023-12-17 23:02:55
Disinflation is on the rise and with it, the risk of speculative games heating up. Long rates have fallen by 0.7 to 0.9 basis points since their peaks in October, reflecting the anticipation of an upcoming relaxation of monetary policy, and the stock markets have recovered with a vengeance. They have jumped more than 10% since their low points in October and are now close to or above their historic highs. Does this mean that following having shown remarkable resistance since 2019, the markets might start a new upward rally with fanfare, and allow themselves to be overcome by the intoxication of the summits? This is a possible, probable, but dangerous scenario, which might come at a very high price and trigger an episode of very strong instability in the near future.
Two possible scenarios for scholarships
At this point, two scenarios are possible. The first is that of temperance. The stock markets having not overreacted to the accumulation of dark signals which promised their debacle since the health crisis, they might, conversely, not give in to euphoria. Current prices would already incorporate the good macro-financial news of the moment, in other words the decline in inflation and long-term rates. Their past resistance in fact testifies to the markets’ tenacious belief in the fact that the disruptions were only temporary. The weakening of corporate accounts, inherent to the deepening recession, should rather weigh down prices in the quarters to come.
This reasonable point of view responds to another version, which also has a credible narrative. Starting from 2 main observations: 1/ The growth of the American stock market, as impressive as it has been over the past 10 years, seems robust. American prices have certainly multiplied by more than 2.5 over the past 10 years. But this surge has not disconnected it, or little, from the profits of the champions who are popular. When we relate the flagship American index to the results per share, the ratio remains very far from the extremes which precede the great past tumbles. 2/ It would take a surge of more than 30% in prices next year, given the profits anticipated by the markets today, for this ratio to reach the high risk threshold. In short, operators can indulge in euphoria before being overtaken by dizziness.
Outlook for 2024
On this basis, we can easily imagine a sequence of booming prices in 2024, the economic slowdown, the drop in tensions on the labor market reinforcing a scenario of accelerated decline in interest rates initially and arming bullish speculation .
Where the problem lies is when we look at the robustness of the profitability levels observed. Which sectors are behind today’s impressive levels:
• Tech first, whose profits per share have multiplied by 3 in 10 years, a performance that the enthusiasm around AI should consolidate in the eyes of the market.
• Health or finance, but also the real estate, online sales, energy, materials and even industrial sectors.
However, the performance of many of these sectors is eminently unstable and sensitive to the economic situation, with real estate in the lead. Another downside is that inflation will no longer artificially boost the performance of major accounts like last year. Finally, even regarding digital industries, the acceleration around AI is first and foremost a factor in intensifying competition between players and redefining acquired positions, more than an immediate lever of profitability.
Prices are therefore formed on the basis of a drop in rates, the speed of which might disappoint, supercharged profits but whose dynamics are more than uncertain, and with in the background, a narrative on the AI revolution which is quick to heat up. minds, as digital knows how to produce regularly, but whose conversion into short-term profits remains largely unknown. In this context, the risk that tempers and prices will heat up next year is significant, with operators preferring to be wrong with others than right on their own. It will be up to central banks to sober them up in time, if they want to avoid a major tumble at the turn of 2024-2025.
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