Weekly review 16 October 2023: Seeking growth


The third quarter earnings season took off last week. This year, earnings growth has been a scarce natural resource. Is there any improvement in sight? What can fixed income investments offer as an alternative for stocks?

Last week saw mixed developments in the investment markets. The equity market evolved in a positive direction early in the week, only to come down later in the week on the back of higher-than-expected inflation figures. Last week ended slightly above zero in the key equity markets.

The data calendar for the current week is almost empty. The USA will release its retail sales figures, which are expected to have weakened in September. New housing market data will also be published later this week. The general expectation is that new housing starts have slightly increased in September, while the number of home sales and building permits is expected to have declined moderately.

Minor turbulence on the equity markets – fixed income market gaining in attractiveness

Early in the week, US central bankers issued comments that put the brakes on interest rate hikes after market rates rose sharply. As a result of these comments, market rates fell last week, which in turn led to a rise in the equity markets.

After the positive development in the first half of the week, the equity markets came down later in the week on the back of higher-than-expected inflation figures. Increased geopolitical uncertainty also weighed on the equity market.

The fixed income market, which has been unattractive to many investors in recent years, has piqued a lot of interest lately – and for a reason, because the return expectation on fixed income investments has come closer to that of the equity markets as interest rates have risen. The equity valuation level relative to their past is moderate in, for example, Europe and the emerging markets.

Looking back, it is safe to say that the more risk investors have taken on the fixed income markets this, the more they have gained. Riskier high-yield fixed income investments have returned substantially more than government bonds, which are considered to be relatively risk-free.

Let’s look at the equity and fixed income markets from the perspective of spreads. The spread is the additional yield over the risk-free rate that the investor is expected to earn if they invest in riskier instruments, such as corporate bonds or equities, instead of government bonds.

The spread for low-risk fixed income investments is currently around 1.5 per cent, while it is about 2.5 per cent for global equities. The spread for higher-risk high yield fixed income investments is close to five per cent.

The third quarter earnings season took off

The Q3 earnings season took off on a positive note last week in the USA. Of major US banks, Citigroup, J.P. Morgan and Wells Fargo each reported figures that exceeded expectations.

Overall, no significant changes are expected to have taken place during the third quarter compared to last year’s figures. Earnings during the third quarter are expected to have fallen somewhat, by about two per cent, on the index level.

The final quarter of the year, in contrast, is expected to deliver strong earnings growth of up to 7–8 per cent. However, if the economy simultaneously declines, achieving figures as high as this during the rest of the year may prove challenging.

Last year’s strong growth was primarily based on the energy sector’s solid performance. This year, the situation seems to be the opposite, with the energy sector contributing negatively to the earnings growth of the market as a whole. Currently, especially the consumer goods and services segment and communications and technology companies are expected to deliver minor growth. There are no significant changes in one direction or the other on the horizon for the sectors, either.

Has inflation already peaked?

In addition to earnings, September inflation figures were published in the USA last week. Headline inflation in the USA remained at 3.7 per cent, which is the same as in August. Core inflation (inflation less food and energy prices), in turn, continued on a downward trend, moderating to 4.1 per cent from 4.3 per cent in August. High inflation was mainly driven by the rise in housing costs as a result of higher interest rate costs, among other things.

Inflation is thus still high but developing in the right direction, as growth finally seems to have largely come to a halt. US core inflation showed a minor decline earlier this year but took a slight upward turn again. In Europe, too, inflationary pressure seems to have eased in recent weeks.

The big picture in terms of inflation is that inflation is moderating. From the perspective of central banks, this is good news, although the inflation level is still too high.


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