Weekly review 13 February 2023: Stock rally driving equity valuation levels up


The beginning of the year has been strong for fixed income and equity investors alike. Equity valuation levels, although driven up by rising stock prices, still remain historically moderate in both Europe and the emerging markets. In the USA, in contrast, the valuations are already somewhat expensive.

The fixed income markets have seen a strong start to the year and volatility is beginning to stabilise. Compared to the first weeks of the year, last week was somewhat softer, however. With the economic outlook brightening a tad and uncertainty dissipating as a result, corporate bond spreads have contracted significantly.

Yield curves in both Germany and the USA are currently inverted, meaning that short-term interest rates are higher than long-term rates, which has proven in the past to be a reliable indicator of a recession. The US 10–2-year treasury yield spread, for example, which is now well into negative territory, predicts a recession. In the past, each recession has been preceded by the yield spread dipping to or below zero. That said, it is also true that the yield difference has sometimes given false alarms.

The equity markets have also enjoyed a strong start to the year. The best-performing market has been Europe. Over the past few weeks, the US market has been spurred on by growth companies and especially large technology companies. The recent stock rally has driven equity market valuation levels somewhat higher, particularly in the USA. In Europe and the emerging markets, the valuation levels still remain moderate compared to their history; in the USA, in contrast, the valuations are already somewhat expensive. Companies’ earnings are currently expected to shrink by a couple of per cent, whereas earlier expectations were for small growth. However, the equity markets are not fully pricing in a possible recession.

Last week’s strong equity market rally stabilised and no major movements were seen in either direction.

Earnings season continuing

The earnings season for last year’s final quarter is continuing.

In the USA, earnings have contracted by around three per cent, with two thirds of the companies having released their reports. Net sales growth has been only five per cent, which means that in real terms, net sales have contracted, as inflation in October–December was 6.5–8-0 per cent. In other words, the growth in net sales actually stems from inflation, not from producing or buying more goods or services in real terms.

Earnings performance has been weak especially for technology companies and companies in the materials and media sectors. The weak performance of the materials sector can be explained by falling raw material prices and simultaneously rising costs. The media industry has been weighed down by the failure of social media companies’ performance to meet market expectations and, for more traditional media, the reduced marketing and advertising budgets of companies needing to cut costs.

The earnings performance of industrial companies has been largely positive and many of them have improved their earnings. The earnings growth in the whole sector has been primarily driven by the defense industry, which has benefitted from growing defense budgets as a result of the war in Ukraine, and by transport and logistics companies supported by falling energy prices. Energy companies have continued to post large growth figures. However, earnings growth is moderating with energy prices currently at a lower level than last year. In the USA, the assumed plight of consumers caused by high inflation has had little impact on the performance of consumer product and service companies.

In Europe, companies’ earnings have contracted by two per cent, with more than a third of the companies having reported their earnings. The earnings have, however, been better than feared before the earnings season. Net sales growth was +11.5 per cent on average. Real growth remained modest, however, as inflation was around 10 per cent.

Especially the materials sector and providers of discretionary consumer products and services have posted weak earnings. The earnings performance in the materials sector is weighed down primarily by steel industry companies’ contracted earnings due to high electricity prices and low steel prices. Unlike in the USA, the weakening of consumers’ purchasing power can be seen in the earnings of European companies, with consumers having reduced the use of discretionary products and services (such as travel and restaurants). An exception to this has been the companies manufacturing luxury products and car manufacturers. Energy companies have continued to post large growth figures also in Europe. Just like in the USA, earnings growth is moderating, however.


Nothing presented here is or should be taken as an investment recommendation or solicitation to subscribe for, buy or sell securities. When making investment decisions, the investor must carefully familiarise themselves with the information given on the financial instruments and understand the related risks. The investor must base their decision on their own assessment, goals and financial situation. Risk is always inherent in investment activities. The value of the investment instruments may increase or decrease. The past performance of investment instruments is no guarantee of future performance.

Show all releases and news