Wall Street: What direction after a "rotten" October?

Wall Street: What direction after a "rotten" October?

Photo credit © Reuters

(Boursier.com) – Why did the US stock markets fall in October, even as the results of companies in the third quarter, in Europe as in the United States, are well above the expectations of analysts? Is this the beginning of a broad correction, or even a bear market, or a simple break in the longest rise in the history of Wall Street, which has now lasted 9 years and 7 months to United States ?

The answer to this question will depend on many factors, including US-China trade tensions, the Fed's monetary policy, and the results of mid-term elections in the United States, which will determine Donald Trump's ability to pursue not its reforms, especially its infrastructure renovation program.

Technology has sealed markets in October

In October, Wall Street had its worst month in seven years, with a 5% drop Dow Jones, 7% for the S & P 500 and 9.2% for the Nasdaq Composite, rich in technology stocks, the latter having benefited for several years from a sometimes dizzying rise. For the Nasdaq, this month of October was even the worst month for 10 years, in November 2008, in the midst of the crisis of "subprime" credits …

A group of 6 internet giants (Facebook, Alphabet, Apple, Amazon, Microsoft, Netflix) even dipped 13% in October, according to Refinitiv, despite overall results exceeding expectations in the 3rd quarter. Investors have sanctioned the slightest difference, even small, compared to forecasts and especially, they were sometimes disappointed by the forecasts of these companies, including Amazon and Apple, who were cautious for their end-of-year sales.

Profits up 25% from Q3 2017

Yet, of the 74% of S & P 500 companies that have now published their 3rd quarter accounts in October, 78% of them have done better than expected in terms of profits, and 61% have posted earnings above expectations. , according to statistics held by Factset firm (Dow Jones group). The average increase in earnings per share is close to 25% (24.9%) compared to the same period of 2017 which, if this figure is confirmed for the entire S & P 500, will represent the best performance since the 3rd quarter of 2010 , according to Factset. At the end of September, analysts' consensus was that the "S & P 500" will rise by just 19% in Q3 2018.

As for the forecasts for the 4th quarter, they have not deteriorated in the vast majority of cases. Analysts have, however, noted some concerns, as so far 46 companies in the S & P 500 have revised down their Q4 forecasts, while only 24 have revised them upward, the other companies have not changed their perspectives.

A sharp slowdown in profit growth in 2019?

Stock market investment is motivated not by past data, but by expectations of future earnings per share, so it seems that investors believe that corporate profits should significantly slow their rise in 2019 … The future will tell if the markets are right to worry, but for now, they see the risks accumulate for the next quarters, starting with the increases in business costs related to the rise of customs barriers and rising prices raw material.

In addition, the rise in interest rates, led by the Federal Reserve, increases the financial costs and increases the costs of borrowing, which will also reduce profits. Finally, the corporate tax cuts implemented by Donald Trump in 2017 are now digested, reducing the positive base effect that their implementation had had in the first two years.

For 2019, the asset manager Blackrock still expects a year still marked by a positive environment for corporate profits. The consensus of analysts still expects a growth of 10% of profits in 2019, after an increase of about 20% in 2018. Some analysts are less optimistic, especially those of Morgan Stanley, which is forecasting a limited 5% gain in earnings per share next year. This significant slowdown is particularly related to the policies of the Fed and other central banks, which "have tightened their monetary policy more than the market (and possibly the economy) can bear," say analysts at the US bank.

Wall Street generally progresses the year after the "midterms"

In the very short term, the markets have their eyes riveted on the results of the mid-term elections in the United States, where a failure for Donald Trump (for example the loss of the Senate) would be badly perceived, because the Democrats would be likely to postpone This is the reason why Trump's tax cuts have continued and its vast American infrastructure renovation project is being curbed.

According to statistics compiled by the 'RiskHedge Report' website, published Tuesday by Marketwatch, since 1946, there have been 18 "midterms" and US stocks have increased in the 12 months following each of these elections! And what an increase, since it has reached on average … 17% over 12 months, and even 32%, if we take for reference the lowest of the year "midterms" …

However, other statistics moderate this optimism: According to the firm Fundstrat Global Advisors, which has studied the markets since … 1896, the average market rise was only 1.9% when the party of the president lost the majority in the House of Representatives (the most likely assumption for Trump). When the president's party retained its majority in the House, the increase was nearly 17% in the 12 months following the election.

The great fear of a trade war between Washington and Beijing

Beyond the elections, the Fed's monetary policy and profit prospects, stock market developments will continue to be guided in the coming weeks by trade negotiations between the United States and China. In the event of a failure leading to a large-scale trade war, the stock markets would undoubtedly be significantly downgraded, as the US and global economies are likely to suffer, which in turn could lead the Fed to pause in its cycle of monetary tightening.

The latest echoes from China but also from Washington seem to point to a desire to reach an agreement. US President Donald Trump is scheduled to meet his Chinese counterpart Xi Jinping at the end of the month in Argentina on the sidelines of the G20 summit in Buenos Aires.

© 2018, Boursier.com

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