Neither the French debt crisis, nor oil; nor interest rates; nor inflation; and the stock market marks historical highs, to its own. We already discussed last month the reason behind this behavior, but it is important to remember it. The corporate earnings cycle remains strong and most importantly, the market expects it to remain strong, despite the complicated economic and geopolitical environment. There are opinions for all tastes, from those who say that we are at the peak of this evolution to those who believe that this evolution will continue strong. We only have two certainties, the AI revolution is an event of economic revolution that will increase productivity, which has its risks and the second certainty with which we work is that it is more dangerous to be outside the market than inside, even assuming that we can witness a certain slowdown in the coming quarters in business profits that translates into more or less profound corrections in the markets. In the short term, strong investments in CAPEX will continue to maintain an important part of the momentum reflected in the accounts of listed companies.
Beyond the major indices, we are witnessing very high sectoral rotations where energy, semiconductors, health, Magnificent 7, batteries and memories alternate days of very strong increases with strong falls. In fact, this last pull of the indices is given because the Magnificent 7 have had a very good performance after a very weak year for them and when we had even gone so far as to affirm that some of them had remained at very attractive valuations, their prices had stagnated while their profits continued to rise and finally in recent months the market has adjusted this divergence.
Inflation is forcing rates to rise and this should slow down the markets, we are seeing spikes in yield curves, the geopolitical environment has led oil above one hundred dollars and supply problems in already refined products, diesel being the one that has the most supply problems. Already at the beginning of the war in Ukraine, inflation skyrocketed and it seemed that we were going to very high levels permanently. We believe that something similar could happen and the “structural” inflation that many analysts predicted at that time will return to normal once the market distortions disappear or the market learns how to solve them, as already happened in Ukraine.
In the following months we will experience more events. Will the FED dare to raise rates before the midterm elections? Or perhaps they prefer to wait until later to apply harsher measures? Will Mr. Trump manage to solve the Iran hornet’s nest that he has gotten himself into before midterms or is it on its way to perpetuating itself? Will the published business profits return to save the furniture and fuel the classic “Santa Claus rally”. Is there a solution for France or could there be a contagion effect in the euro zone?
Can you imagine that we are really at the beginning of unexpected economic growth? Do you know the monstrous figures planned for infrastructure investments? It is not the first time that we cite figures given by Apollo presented at its Investor Day, in this regard, others such as PWC, S&P, Goldman Sachs also make forecasts that have a common denominator, the very large investment figures expected in AI, Digital Infrastructures, Electricity networks, reindustrialization, figures that to give us an idea can only be compared to the US GDP in terms of comparable magnitudes. Has this been the engine of this unstoppable cycle of corporate profits and are we only at the beginning or are you supporters of the apocalyptic version that suggests that we are at the peak of valuations and that the current investment in Capex is a bubble? Many questions to answer and our position is one of pure pragmatism in scenarios where different gurus have completely different positions, we must remain within the market. What is yours? Trick or Treat?