Solid fundamentals despite high valuations
Equity valuations have risen sharply once again. In the US, the forward price-earnings ratio (P/E ratio) is back above 22, more than two standard deviations above its long-term average. This means that many equity indices are not attractively valued. However, as long as corporate earnings continue to grow solidly, this should not be a stumbling block for the time being. The second-quarter earnings season is already underway and, despite a few outliers, the majority of companies have surprised on the upside so far. Banks and tech stocks have once again performed particularly well. We expect analysts' initially rather moderate expectations (4% earnings growth in the US and 0% in Europe) to be significantly exceeded in the end (see chart). This is positive for the equity markets and could compensate for the otherwise rather poor seasonality in August.
No excessive euphoria despite all-time highs
Our sentiment and positioning indicators usually warn of caution after a strong rally. However, several of our indicators are currently in neutral territory and we have only received isolated sell signals. One warning sign, for example, is the massive underperformance of defensive sectors relative to cyclical sectors. Taken as a whole, however, there is no sign of excessive euphoria. The economy has so far proven to be much more robust than we and other experts had expected. In fact, the data is increasingly positive. On the other hand, the effect of trade tariffs on inflation has been modest so far, as the much more significant service inflation is declining. Although we expect inflation rates to rise slightly over the next few months, the US Federal Reserve is likely to cut interest rates for the first time in September. This could provide further impetus for the stock markets. We are therefore starting August with a slight overweight in equities.