Guest comment: Thomas Eitzen, credit strategist at SEB
One can think of a course for investments An expression of two things: What we think is happening has the potential to be much worse or better. If I believe there is likely to be good growth, but I worry that things could get very bad, I will pay less than if I believed in the same main scenario, but thought the risk of a crisis was small. Are we able to describe what we believe? Basic condition In addition to the potential for serious problems, we have come a long way in determining what the path should be.
The interest rate market says there is no risk of a financial crisis. The stock market agrees. The credit market (the more negative people) also agree that this is the right way to go. Well, one is still a bit skeptical about real estate and the worst companies (CCC credit rating), but even here credit investors see the light at the end of the tunnel. Therefore, the market assessment is that the risk of a crisis is very low.
What about the central scenario? So, how will this likely end? Apparently, it's precious joy and fun. Inflation is basically under control and corporate earnings are generally healthy. Since earnings growth expectations for the broad market are reasonably high, there appears to be little upside. If the economy is estimated to be in good shape, and there is no risk of a crisis, there is only a downside to rates.
But stock market prices really That the economy should go like a bullet? One way to measure this is to divide the market into segments and look at how profits are generated and what they are expected to be. Is it true that the entire business world is doing well? We divide the (US) stock market into 40 sectors and examine them. The first observation is that 18 out of 40 sectors (46 percent) saw negative earnings growth last year. Typically, this share is about 20 percent. We have only seen half of the sectors experience negative growth three times in the last 30 years; During the dot-com crisis, during the financial crisis, and finally during the Corona crisis.
Article author: Credit Strategist Thomas Eitzen at SEB. Photo: Ivan Kvermi
The fact that last year's profits were lower than the previous year should not be solely due to a deteriorating economy. For many, 2022 was a great year – thus bumping up the list for 2023. So we go ahead and count how many sectors are expected to generate lower profits in 2024 than in 2023. Here too, the number is around 50 percent. !
Once again, these are numbers that we have only seen in the three crisis periods. If we adjust for the fact that stock analysts are more positive than most people, it's likely that 60-70% of sectors will make less money in 2024 than they did last year.
The stock market does not seem to believe that growth in the economy is broadly based. If one chooses the negative interpretation, it means that the market (implicitly) believes that the overall economy will perform poorly in 2024. This is rarely helpful for markets. But here also lies the positive opportunity. Imagine if the economy turned out to be absolutely fine? And that 70-80 percent of sectors have growth?
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