The fifth symphony Tchaikovsky’s, written at this point in the summer of 1888, is known because it represents total resignation to fate, a feeling quite similar to what investors are experiencing in this tortuous exercise.
The last few months have been terrible: we have experienced the worst start to the year for the stock markets since 1970 and Treasury bonds are down 9.2%.
The cycle moves very quickly and central banks are working hard to tighten financial conditions, raising interest rates at all costs, to stifle an inflation not seen for 40 years. In their messages they already recognize that their precipitation will cause a sudden halt to growth and that recession is an increasingly likely scenario.
This situation has led to a significant contraction in valuations. Over the past 6 months, the S&P 500 12-month P/E ratio has dropped 25%, correcting up to 15.8x earnings—a 5.3% discount to its historical average. Meanwhile, the European PER stands at 11.7 times, 17.6% lower than its long-term average. Do these prices mark a clear floor for the stock markets? Not necessarily.
US corporate earnings will begin on Tuesday and their resilience is surprising. Despite the fact that it is falling, the market consensus expects quarterly earnings growth for the S&P 500 of 5.6% and 11% for the year as a whole. In Europe, which is subjected to Russian gas, the estimates are even higher: 19.2% for the second quarter and an accumulated 15% in 2022. Furthermore, despite the increases in industrial prices at the beginning of the year, it is estimated that 71% of S&P 500 companies and 64% of European companies will improve their profit margins compared to 2021.
We enter a moment similar to the one that occurs at the end of the second movement of the fifth symphonywhen a conclusive diminuendo begins: although the current situation of households and companies makes us think that we will not face a recession as hard as that of 2000 or 2008, there has been no recession in history, no matter how technical been, in which profits have stopped shrinking —since the 1950s they have suffered an average reduction of 18.4%—.
This week’s stock market bounces sound like the final coda of our symphony, in which, between trumpets, horns and trombones, the victory of faith that saves the protagonist from his destiny is expressed. But deep down it is a certain mirage, since Tchaikovsky did not really solve his protagonist’s mess until he wrote his last symphony, No. 6. In the same way, the current stock market valuation could well be an illusion . Bear markets typically take an average of 14 months to reach their lows, a situation that makes it advisable to remain cautious regarding corporate results.
Joan Bonet i Majó He is director of market strategy at Banca March.
