Consolidation after record surge?
A more positive earnings trends, upward forecast revisions and potential new record earnings for the Stockholm stock exchange make it hard to be pessimistic about equities today, but after a historic rally over the past six months, valuations are high. Meanwhile the interest rate outlook has deteriorated significantly since the turn of the year. Investor positioning is relatively optimistic. Any setbacks from our almost ideal main scenario of higher earnings and lower interest rates would risk triggering significant negative reactions. A period of consolidation, as earnings catch up to valuations and political threats such as the risk of a trade war are dealt with, appears both desirable and likely.
Encouraging report period
First quarter 2024 corporate reports have been quite encouraging. After a weak start to the year, consensus earnings forecasts appear to have bottomed out in March. The trend of forecast revisions is now positive again. Positive earnings forecasts are important, since there has been less support than expected from falling interest rates in recent months and valuations are relatively high. In our view, the share price trend has not been more positive during the Q1 report period itself due to the deteriorating interest rate outlook − a complete reversal compared to the preceding report period, when weak reports were more than offset by positive macroeconomic data.
There is great variation between sectors. Capital goods and industrials, including the automotive sector, are the main contributors to the big upward revisions in earnings forecasts. However, banks and health care have also seen their 2024 earnings forecasts raised. Higher prices for many metals and forest products, combined with clear signals that the inventory liquidation that characterised 2023 is at an end have also contributed to significant upward revisions in forecasts for the forest and metal sectors.
New record earnings ahead
Despite what in many respects is a rather severe economic slowdown in Sweden as well as much of the euro area and China, earnings of listed Swedish companies have continued to grow. They are now on track for new record earnings this year. Given extreme fluctuations in energy and transport prices, it is a different earnings situation for the stock markets in Norway and Denmark, where earnings peaked in 2022 and fell significantly in 2023 but are expected to grow again this year. Earnings growth in Denmark is driven by the health care sector, led by Novo Nordisk. The expected earnings increase in Norway is driven by everything from telecom operators and aluminium to oil services and maritime shipping, but aggregate figures have been held back by an expected decline in the earnings of oil producers.
A smaller, slower downturn in interest rates
Lower inflation continues to bode well for key interest rate cuts this year, but from a stock market perspective the outlook has deteriorated in recent months. Because the US labour market is still overheated and consumer price inflation has levelled off at above 3 per cent instead of continuing to fall, the market has delayed and lowered its expectations regarding upcoming rate cuts.
Far fewer and slower central bank rate cuts are bad news for the stock market, all else being equal. The main driver of the market rally in late 2023 was these same expectations of sharply lower interest rates soon. The negative impact at the equity index level has meanwhile probably been offset by the brighter earnings outlook.
Esbjörn Lundevall
Equity Analyst, Investments