Column: U.S. stock prices continue to soar, likely to remain sustainable amid expectations for monetary easing | Reuters

2024-02-26 09:44:00

[1/2]“The stock market is not the (real) economy itself.” This “truism” has rarely been more applicable than it is now. While a handful of megacap stocks are driving overall U.S. stocks to record highs, many sectors are lagging and economic growth appears to be weakening. Photo taken on the 12th at the New York Stock Exchange (2024 Reuters/Brendan McDermid)

[オーランド（米フロリダ州）　２３日 ロイター] – “The stock market is not the (real) economy itself.” This “truism” has rarely been more applicable than it is now. While a handful of megacap stocks are driving overall U.S. stocks to record highs, many sectors are lagging and economic growth appears to be weakening.

However, at least the US is on a growth trajectory of well over 3% on an inflation-adjusted basis and 5% on a nominal basis, and the profit growth rate of companies in the S&P 500 (.SPX), opens new tab last year was 10%. %, which can be used as an excuse to some extent. Still, the contradictions faced in other regions are much greater. Even though Japan has just entered a statistical recession and the European economy has barely grown in the past two years, the Nikkei Average 225 (.N225), opens new tab and the STOXX Europe 600 Index (.STOXX) , opens new tab all reached new highs.

Whenever stock prices hit levels that cannot be compared to past peaks, questions arise about whether the rise is sustainable, and talk of a bubble permeates the market.

If the strength of the stock market in the United States is not reflected in the real economy, such concerns will become even more acute.

While it’s true that the U.S. unemployment rate remains at historic lows and economic growth was surprisingly strong last year, few think either will last.

Fortunately for stock investors, however, the market appears to be holding its own momentum beyond the real economy.

“What’s more correlated with the market than macro conditions is the movement in corporate earnings, and that’s a pretty solid trend,” said Justin Bergin, director of equity research at Ameriprise Financial.

In such situations, indicators such as the Buffett Index are often used to highlight the risk of a sharp decline in stock prices.

The Buffett Index, named after famous investor Warren Buffett, shows whether stock prices are overvalued or undervalued by comparing stock market capitalization and nominal gross domestic product (GDP).

Current calculations suggest that depending on the numbers used, the market capitalization of U.S. stocks ranges from 1.5 times annual GDP to nearly double annual GDP, which is extremely expensive from a historical perspective.

Buffett’s index also has flaws. This is because the total value of goods and services produced by the real economy over the past year is compared with the stock market capitalization on any particular day, effectively contrasting “stock” and “flow.”

The index also ignores the fact that 15 years of central banks’ trillions of dollars of quantitative easing have benefited asset prices far more than the real economy.

However, according to a paper compiled in 2022 by Lawrence Swinkels, an associate professor at Erasmus University, and Thomas Umlauft of the University of Vienna, the Buffett index, although rough, is a direct measure of investor sentiment toward the real economy and the stock market. That’s a great way.

Swinkels and Umlauft, who is also Robeco’s executive director of research, believe that as more economic resources are allocated to capital markets, stock prices are pushed up without an equivalent increase in activity in the real economy, and expected returns are pushed up. They claim that there is a simple relationship between the two.

It could take several years, or up to a decade, for the most stretched valuations to result in a “substantial” decline, he said.

Colin Graham, who works with Swinkels at Robeco, said: “The Buffett index and other indicators are telling us there’s cause for concern at this stage, but they don’t tell us what’s going to happen over the next six months to a year.” It pointed out.

The stock currently appears to be in an optimal environment. The consensus is that US corporate profits will increase by 10% this year, and the US is unrivaled as the world’s leader in high-tech and artificial intelligence (AI).

Valuations for U.S. stocks overall may be high. But it is far from the highs of 1999-2000 or just three years ago. The outlook for interest rates is also a positive factor, as the U.S. Federal Reserve’s next move is likely to be a rate cut, and the balance sheets of businesses and households are relatively healthy.

European stocks have much lower valuations, and Japanese stocks are still undervalued. In Japan’s case, even after the Bank of Japan lifts its ultra-accommodative policy, real interest rates will likely remain significantly negative.

Additionally, Japanese companies are enjoying a major tailwind from a weaker yen and the most accommodative financial environment in 30 years. So it’s no wonder that many investors are bullish on Japanese stocks, even though the Japanese economy is in a statistical recession.

Tom Becker, a portfolio manager in the Global Tactical Asset Allocation team in BlackRock’s Multi-Asset Strategy Solutions Group, said, “Japan is our biggest buy-and-hold in equities,” and believes that Japan is “debt/deflation trap.” He explained that he liked the structural story in which the weaker yen benefits corporate performance and allows companies to raise their profit margins again.

A persistent rise in interest rates and yields, a sharp rise in unemployment, or a financial shock could quickly worsen the situation. Still, for now, it appears that the optimal environment for stock markets in general in developed countries is likely to be maintained.

(The author is a columnist for Reuters. This column is written based on the author’s personal views.)

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The author is a columnist for Reuters Breakingviews. This column is written based on the author’s personal opinion.

Jamie McGeever has been a financial journalist since 1998, reporting from Brazil, Spain, New York, London, and now back in the U.S. again. Focus on economics, central banks, policymakers, and global markets – especially FX and fixed income. Follow me on Twitter: @ReutersJamie

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