After a slow August, there has been a lot going on in the US stock market lately. Companies performed better than expected, headline numbers were encouraging, and the S&P 500 is up nearly 25 per cent from its October bottom.
But now the stock market has gained a real competitor in the search for investor favor: the interest rate market.
Nordea investment manager Robert Ness breaks the story into two parts when he talks about the markets. One part is about companies.
– Things are going well with the companies. They earn as much this year as they do in 2022, and 2022 was a record year. There are no signs from companies that interest rates will rise sharply. Then we had artificial intelligence, which made tech companies invest heavily and be optimistic about the future, before we moved on to the second part.
– When you calculate the valuation without looking at the interest rate, that’s totally fine. But if you compare prices in the stock market with what you can get risk-free in the interest rate market, it doesn’t look so good, says Ness.
In this case, it uses a fairly simple form. Based on this year’s earnings forecast, the US stock market is priced at an earnings multiple of about 20. This gives an earnings yield of about five percent. The interest rate on US government bonds for 30 years, that is, the ultra-safe paper, is 4.3 per cent. The difference between the two is 0.7 percent. Even if we take into account the expected profits for next year, the difference will not exceed 1.0 percent.
The stock market only gives an expected return that is higher than interest. It would be natural for professional investors to take more money at interest, but we haven’t seen any trends towards that, says Ness.
Based on this interest-adjusted pricing, the US stock market has not been so expensive in 18 years.
Næss has no fear of heights.
When it comes to valuation, the market reaction must be very costly. He says the market can react faster if you also have other bad news.
And even if the overall market is expensive, not all stocks will be equally expensive.
– There’s a big spread. Ness, who is known as a value-oriented manager, says growth stocks are 21 per cent higher than value stocks.
– So you’re a little behind the market?
– Yes we did. Last year, he says, it was the opposite.
DN asks if Næss doesn’t have any shares he thinks are cheap and underpriced. He has prepared a whole bunch of US stocks that have a much lower dividend yield than the market as a whole: biopharmaceutical company Bristol-Myers, healthcare company CVS Health, biotech company Amgen, Ebay and Cisco.
– Bristol-Myers thinks about the future for four or five years and the market fears that the new products will not sell as well as the old ones. I think the market is very bleak. There is nothing stopping it from rising 40-45 per cent if the market has a little faith in it, says Ness of the cheaper stock.
It could be the worst month of the year
The three major indexes on Wall Street rose sharply on Monday, but that is little consolation for the August stats. And with a drop of more than 3 percent in August, the S&P 500 is still on track to post its worst month so far this year.
But a lot could happen this week. The macro calendar is full of American goodies. Housing statistics will be released on Tuesday, GDP figures will be released on Wednesday and PCE inflation numbers will be presented on Thursday. It is the US Federal Reserve’s preferred inflation target.
And on Friday the actual raisins come into the sausage. The US employment numbers will be watched with a skeptical eye by the market. Here, investors know the number of jobs created in August, unemployment and wage growth.
On Monday, trading volume in the S&P 500 was down 25% from the previous month’s average, according to Bloomberg. Nvidia’s stock market index rose nearly two percent, Apple a meager percent, Meta about one and a half percent, and 3M more than five percent after several media outlets reported earplug settlements.(conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using links that lead directly to our pages. Reproduction or other use of all or part of the Content is permitted only with written permission or as permitted by law. For more terms see here.
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