Investors do not see the end of the tunnel. European stock markets were again down sharply on Thursday, the day after Wall Street’s biggest fall since June 2020. The markets are no longer adjusting only to the Federal Reserve’s rate hike by revising the multiples downwards. of valuation. They are now also alarmed by the impact of inflation and monetary tightening on the economy, household purchasing power and corporate margins.
On the Paris Stock Exchange, the CAC 40 plunged 2.34% at midday, while the DAX in Frankfurt lost 2.09%. The day before, the Dow Jones lost 3.57%, the S&P 500 lost 4.04% and the tech-heavy Nasdaq lost 4.73%. The S&P 500, Wall Street’s broadest index, closed at a new yearly low of 3,923 points.
Economic downturn
“There is no single catalyst behind this drop,” said Deutsche Bank’s Jim Reid, “but weak US housing data, as well as Target’s decision to cut its earnings outlook, fueled investor concerns about consumer resistance. » Fears of a major economic slowdown are growing as the President of the ReserveUS Federal, Jerome Powell regularly insists on its determination to reduce inflation.
Until now, the stock market correction has mainly affected the most speculative market segments, from cryptos to SPACs and the technology sector. The Nasdaq has plunged 28% since its last record high in November. The decline in the S&P has been more moderate, with an 18% fall, similar to that of the CAC 40, since its peak on January 5. Drops of this magnitude are not uncommon for generalist indices. The Parisian index experienced some in particular in 2018 and 2016, before starting to rise again.
Stall of valuations
This stalling of the world stock markets is above all linked to the rise in interest rates. Earnings prospects remained at a high level. Stock market valuations, measured by PER (price earning ratios) which relate the price of shares to expected earnings, have already largely fallen. The S&P 500 PER fell from over 20 to 16.5 between the end of 2021 and today. That of the Nasdaq, from more than 30 to around 22, just above its average for the five years preceding the pandemic.
“We are now attacking a new phase,” warns Emmanuel Cau of Barclays. “Fears are refocusing on the ability of companies to defend their margins as inflation inflates costs and erodes household purchasing power against a backdrop of an economic slowdown,” he explains.
“A new phase”
Investors are well aware that the strong first quarter results – where around 7 in 10 companies beat analysts’ expectations – cannot be extrapolated for the rest of the year given the threats to the global economy. : the problems in China, the war in Ukraine and the American monetary tightening. The specter of a global recession appears more and more concrete, and with it, a questioning of historically high corporate profits.
It is this danger that keeps investors in suspense today. During recessions, stock market indices frequently fall by 30% or more. This was the case for the Paris Stock Exchange during the coronakrach of 2020, the euro zone crisis in 2011, or even the great financial crisis. “The market may be overestimating the risk of recession”, recognizes Emmanuel Cau, “but investors have no sign that would allow them to hope for anything else”.