Emmanuel Cau (Barclays): “The strong earnings momentum of companies justifies the stock market rebound in recent months”

Posted on Nov 8, 2021 at 6:39 am

The last time the CAC 40 evolved at such levels, in 2000, it collapsed by more than 60% in the eighteen months that followed. Should we fear a new bubble?

We speak of a bubble when prices are disconnected from the fundamentals, but this is not the case today. If the CAC 40 is at a record level for the first time in twenty-one years, it has already been several months that Wall Street has been chaining the highest. The markets are high, but that is not in itself a reason for them to fall.

We talk about a bubble when prices are disconnected from the fundamentals, but this is not the case today

Emmanuel Cau, Equity Strategy at Barclays

Admittedly, there is a lot of liquidity in the markets thanks to the accommodating monetary policies of central banks, which can lead to the formation of bubbles in certain assets. The stock markets also benefit from this liquidity, but the rebound in recent months is above all due to the strong earnings momentum of companies. Quarter after quarter, the results of companies surprise on the rise.

Can the stock markets continue to climb? What are the performance drivers of the CAC 40 today?

Stock market performance is likely to moderate in the coming months, but the environment remains generally favorable for the stock markets. The equity markets benefit from a lack of alternatives: in particular in the euro zone and in the United States, interest rates remain at the bottom and real rates are anchored in negative territory. The “tapering”, that is to say the end of asset purchases by central banks, can take place in an orderly manner. In addition, economic growth remains solid, pressures on costs and margins are linked to the current strength of demand, which should allow corporate profits to continue to climb.

The CAC 40 has many advantages. Sectors such as luxury goods, automobiles and even leisure can hope to capture part of the excess savings accumulated during the crisis. Banks and insurers represent an interesting protection against the prospect of a rise in rates. They are benefiting from solid economic growth with still very low valuations despite their recent upturn. Finally, industrial stocks could benefit from the rebuilding of corporate inventories, which are currently very low. Even more so if Asia reopens in the coming months, which would reduce cost pressures.

What could reverse the trend in the markets?

The Covid remains the great unknown. There is a resumption of the epidemic at the moment in Europe in particular. It would be problematic if one realized that the immunity conferred by vaccines is not as strong as it is hoped today. The risk also comes from Asian countries such as China and Vietnam, which are crucial in production chains. Repeated lockdowns can exacerbate shortages on certain key components. The slowdown in the Chinese economy is another danger, especially for Europe, whose luxury or industrial exports are increasingly dependent on the health of the economy.

The great unknown remains the Covid. […] The risk also comes from countries like China and Vietnam, which are crucial in production chains.

Emmanuel Cau, Equity Strategy at Barclays

Another major uncertainty: inflation. If it were to continue to surprise on the upside, central banks could be led to drastically and suddenly reduce their support policies, whether it be the Federal Reserve or the European Central Bank. This is clearly not their will today, but a liquidity shock would certainly be bad for stocks.

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