For the financial markets, despite the political instability, an encouraging first quarter of 2024 ended: stock indices clearly rising (especially the technology sector, which benefits from the boost from‘artificial intelligence), the bond sector is recovering moderately, awaiting the expected rate cut, likely in June for the ECB. Also because the inflationary flare-up seems to have consumed all the fuel and the increase in prices now stands on average between 2.5% and 3%.
After a great 2023, therefore, with the Nasdaq, the US technology stock market rising by 44%, the Milan and Tokyo stock exchanges growing by 28% – in good company with Madrid (+23%), Frankfurt ( +20%), Paris (+16%) and the 24% jump of the S&P 500 and the Dow Jones (+13%), the two main US stock indexes – here the first months of 2024 have not missed anything. The American blue chip index, the S&P500 has exceeded the 5,000 point threshold for the first time in its history . And already in February the Japanese Nikkei 225 has surpassed the historical record of 1989 of 39,098 points and is hovering around 40 thousand, up by almost 20% since the beginning of the year. The Ftse Mib of Piazza Affari, in its small way, it has already grown by more than 10% since the first session in January.
Is the risk of a bubble approaching?
At this point, more and more voices are being raised to warn investors against the risk of a bubble, even though the economic fundamentals are good and interest rates are about to enter a downward cycle. Among these are Frame Asset Management, a Swiss-based asset management and investment consultancy company. The special observer is the US stock market, the only one capable of setting the tone for all global stock markets. «Rises of magnitudes equal to those seen in recent months have been recorded only 6 times in the last 80 years, and always either following a recession or during the bubble of the 2000s. So? Which of the two polarities are we in?”, ask the company’s analysts in a recent report.
Few titles are driving the US market
Wanting to delve deeper into the analysis, «we also note another phenomenon, namely the poor general participation in this latest rise, the so-called “market breath”. In fact, if in 2023 the price list was practically driven by the “magnificent seven” alone, since the beginning of the year, the leading titles have been reduced to four, although, upon closer inspection, it would be more correct to say two (Amazon and Microsoft) given that Meta and Nvidia have achieved impressive numbers (close to 40% for the former and above 70% for the latter) while Google and Apple have entered negative territory and Tesla has even lost over a quarter of its value.
Diversifying remains a necessity
Faced with the stellar performance of the price lists also the British week The Economist questions itself. And he asks, with a bit of rhetoric, whether it is not appropriate to invest 100% of one’s financial assets in shares». But after a detailed analysis of long-term stock market cycles, he concludes that diversification into bonds and also into other investment categories is actually the best solution.
Economist: no to a stock-only portfolio
The prudence of the Economist’s analysis could have a more general value. After the colossal growth in share prices that followed the end of the pandemic – supported by growth data from the real economy, and unfortunately also from the inflation rate, aren’t we close to a turning point? Or at least is what professional investors call a “correction” approaching?
Too much optimism?
The analysts at Frame Asset Management observe that «For example, it cannot be denied that when news on the current geopolitical situation is published, it is now practically ignored while on the contrary the indications on the health of the cycle are always read in a positive sense». Those who work on the bond market are much more nervous about the future rate situation, although they are quite calm about credit risk, which, like stocks, signals that we are in a phase characterized by “risk on”.
The ratings are high
In reality, for the moment, there are no alarms about the stability of the stock markets and the possibility of their further – slower – growth. The data considered by some large investment houses as the most “worrying” is that of valuations. At current prices, the price/earnings ratio, still considered one of the main parameters on which to evaluate the correctness of stock prices, is very high and reaches approximately 20 times on average for the S&P500 index. It is slightly lower in Europe and higher in Japan.
But profits are growing by double digits and rates will fall
However, earnings growth remains important: corporate profits are estimated to increase by 11% in the United States and by between 5 and 10% in the Eurozone, despite the weakness of the German economy. Then there is the expected decrease in interest rates, which almost all analysts now estimate will happen no earlier than mid-2024 in the USA, perhaps a little earlier in Europe. But even if rates start to fall later in the year and less than what could have been hypothesized a few months ago (especially in the USA, economists predict 3 cuts by 2023, compared to the 4-5 cuts estimated at the beginning of the year) the scenario is however that of a decreasing cost of money. And lower rates have always represented a powerful support factor for stock markets because they imply higher consumption and higher profits for companies.
