The US Federal Reserve has finally lowered the key interest rate, in an unusually significant move of 50 basis points. Based on a faster than expected decline in inflation, Fed officials have indicated to the media that a further cut of the same magnitude is possible if the situation on the labor market deteriorates. The CME Group's FedWatch tool currently puts the probability of a 50 basis point cut for the next decision on November 7 at more than 53%.
The long-awaited move by many to cut rates for the first time since the start of 2020 marks a turning point in US interest rate policy; the European Central Bank had already initiated a turnaround in interest rates in June. The current economic data in the eurozone currently speaks in favor of further easing, also on the part of the ECB. There are plenty of arguments for this, such as the most recently published PMIs, which showed weakness across the board. The combination of a weak economy and cooling wage growth as well as expectations of a further decline in inflation next year have recently significantly increased the probability of an interest rate cut in October.
The interest rate cuts and the prospect of further cuts boosted the stock markets, which reached new highs at the end of September, both in the USA and in Europe. The upward trend was also recently supported by positive news from China, such as planned monetary policy measures by the Chinese central bank and the announced fiscal policy stimulus. Rising commodity prices have created a positive mood for basic materials stocks in recent days and weeks.
However, there is another reason why investors have recently tended to be much more willing to take risks again. It is the corporate earnings outlook, which can be interpreted positively across the board, especially for US companies. For the S&P, analysts are currently forecasting earnings growth of 9% for 2024 and a further increase of 14% for 2025. European companies are still not quite able to keep up with earnings growth. For the STOXX 600, the consensus currently sees a decline in earnings of almost 5% this year, but an increase in earnings of more than 8% for the coming year.
US equities are also ahead in terms of valuation. The S&P is currently trading at a P/E ratio of 24.2x, which is well above its 10-year average (19.6x), while the STOXX 600 is trading at a P/E ratio of 14.9x, which is a touch below the average of the last 10 years (15.6x). Even if American equities appear a little overvalued at first glance, we continue to see momentum in the USA due to the growth prospects. Share buybacks should support this as usual. In contrast, a dividend yield of around 3.3% on average speaks in favor of European equities. In our view, the sectors that should currently be overweighted are technology, healthcare, consumer staples, financials and utilities.
Author:
Christoph Schultes, MBA, CIIA
Chief Equity Analyst Austria
Erste Group Bank AG
30 September 2024
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Note
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