Why strong first-quarter results won’t save the stock market

Posted Apr 16, 2022, 8:03 AM

At last. After more than two months of fruitless speculation on the impact of the war in Ukraine and the surge in prices for companies, investors have some figures. The ball rolling for the first quarter results got off to a flying start in recent days, with generally good surprises.

On the Paris Stock Exchange, LVMH, Hermès and Publicis have already reassured investors about the dynamism of their sales in the first quarter, with turnover exceeding expectations. The CAC 40 index ended the week up 0.7% to 6,589 points. However, it remains far from the levels reached at the start of the year and is still posting losses of nearly 8% in 2022.

Earnings expected to rise, driven by energy and commodities

Strong first-quarter results are unlikely to be enough to appease markets, which are increasingly nervous given the threats hanging over the global economy. “With resilient but slowing overall growth, and expectations far from excessive, the results for the first quarter should be quite good,” said Emmanuel Cau of Barclays. Earnings are expected to rise by around 10% on average, in both the US and Europe, driven by energy and commodities.

“But given the current uncertainties, investors will focus on the outlook for companies, particularly their ability to move prices, the impact of rising costs on margins, and signs of slowing growth. ask,” he continued. Professionals have already got used to the idea that the historically high margins of 2021 will only decline this year. It remains to be seen to what extent, and whether the increase in activity can offset these pressures on margins.

In any case, the context has clearly deteriorated for the equity markets in recent months. Inflationary shocks followed one another, forcing central banks to toughen up their rhetoric. At the same time, consumer confidence fell sharply against a backdrop of rapidly rising prices.

Rising interest rates weigh on valuations

The sharp rise in long-term interest rates – the yield on 10-year US Treasuries has risen from 1.51% to 2.82% since the start of the year, and that of the OAT of the same maturity from 0.19% to 1.33% – also threatens global stock markets. Mechanically, higher rates mean lower valuations for equities: all other things being equal, the value of future profits is diminished.

The impact is particularly visible on the US Nasdaq. The tech-heavy index has fallen nearly 15% this year, compared to a decline of nearly 8% for the S&P 500, Wall Street’s broadest index. Going forward, this also means that investors will demand much higher profits to get back to the record levels of the start of the year.

Volatility remains

However, the rapid tightening of monetary policy has every chance of weighing down activity in the long term. Not to mention the impact of confinements in China, which have already rekindled tensions in supply chains. On these points, companies will not be able to fully reassure investors. Also, most professionals expect volatility to remain in place over the next few months, even though good results could lead to a rebound in the indices in the short term.

“Until investors have a clear view of the path of growth and inflation over the next few quarters, equities will continue to trade in a relatively tight range,” said David Lefkowitz of UBS. Given the less buoyant context for equities, and based on an optimistic scenario of profit growth of around 10% over the year, he expects the markets to end the year in slight drop.

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