In Scope:

Stock markets ignore the good news

October 2018


Yesterday saw substantial corrections again on Wall Street. The market seems to focus mainly on the bad news in recent weeks. Corporate results are explored and the least good or moderating signals are magnified.
 
Let’s discuss why we do not believe that there is more to it than a temporary correction:

 

The economic picture remains very strong, especially in the US:

  • Business confidence in the US increased again in October and GDP growth in the third quarter may have exceeded 3% again.

  • In Europe, business confidence showed a further slight decline in October, but it is still comfortably above 50.

  • KBC's economists see no reason to adjust their growth expectations on the basis of recent figures. The fears of a sharp rise in the policy rate in the US and a possible end to the growth cycle as soon as 2019 seems unjustified.
 

Business results are quite strong in the US:

  • 160 of the S&P500 companies published figures for the third quarter and reported sales growth of 8% and profit growth of 23.5%. This is 1% and 5% better than expected, respectively.

  • The market mainly focuses on the warnings that a number of companies gave around profit and revenue growth for the coming months. These can be summarized under:
    • Growth is weaker in the rest of the world than in the US
    • The strengthening of the USD is a disadvantage
    • The trade conflict with China creates uncertainty

  • These may be justifiable reasons for a number of companies to moderate expectations, but they can not weigh too heavily for the whole of the (rather closed) US economy and stock market. By the way, for companies in the US, the new North American trade agreement is a boost.

  • How isolated the profit warnings are is illustrated by the technology sector, where profit growth for all companies which have already published results points to an impressive 28% or about 8% better than expected.
 
For the results in Europe it is still too early to draw conclusions. They seem to give, however, a more mixed picture than in the US.
 
Perhaps the increasing sharpness of the political discourse also weighs on stock market sentiment in Wall Street. Some things may cool off after the important mid-term elections on 6 November.
 
In Europe, the uncertainty surrounding the Brexit negotiations and the conflict between Italy and the European commission surrounding the budget may, of course, cause additional stock market fluctuations.