#Market Strategy — 11.09.2017

Global equities: A pause before the upside resumes

Roger Keller

We remain bulls over the medium term

The outlook for equity markets over the next 12 months remains promising. The upside potential relies mainly on earnings growth dynamism, which is good among favourable sales trends and room for US margins to stay high and room for margin expansion elsewhere. We continue to expect earnings to grow by 10% this year and at a high single-digit rate next year, thanks to high operating leverage and despite limited pricing power. Confirmation over coming months that the world economy remains well oriented will progressively provide space for some revaluation, as long-standing investor caution finally cedes to the reality of benign trends.

Meanwhile, central banks will move slowly towards less accommodative policies, which will fundamentally support equity markets but will probably also bring with them higher levels of volatility. These are circumstances that resemble late stages of bull markets but we are still far from transitioning from a fundamentally-driven bull market to a sentiment-driven bull market.

Lack of potential catalysts in the near term

This year’s rise in the global equity market has been led principally by favourable trends in leading indicators, in economic surprises, in earnings revisions and by a weak dollar. Markets are technically fragile (overbought condition, negative divergences, warning message from the weekly MACD, poor breadth…) and potential catalysts for a further rise in prices are difficult to find as the global composite PMI has stabilised (at high levels, compatible with solid economic expansion), earnings will benefit less from positive base effects in the energy sector and the outlook for pro-growth initiatives in the US is clouded by the necessity for Congress to agree first on funding the government and raising the debt ceiling.

Worth remembering is that seasonality is not good in September for stock markets. Downside risks are however limited by the basically sound environment, by the persistence of extremely supportive monetary conditions and by investor positioning that is still limited for this stage of the economic cycle. As a result, we expect either lateral movements in stock prices or limited declines, towards the 200-day moving average. The return of positive momentum in equity markets is likely to come later in the year, when investors begin to focus on the 2018 outlook.