The S&P 500 has broken the magic barrier of 5,000 points and the Japanese Nikkei has finally reached its all-time high of 1989. This is despite the fact that the central banks have dampened overly optimistic hopes of rapid interest rate cuts. The stock market bulls are being bolstered by the high level of corporate profitability, which can be seen in the persistently high margins in the reporting season (despite moderate sales growth). In combination with a robust economy in the USA and the constantly expansive fiscal policy, this makes the Goldilocks scenario appear realistic – don't worry, be happy!
Warning signs on the horizon
Certain indicators are now warning of excessive euphoria. Nonetheless, extreme values have not yet been reached. The situation is similar in terms of valuations, with the price/earnings ratio (P/E) of global stock markets standing at 18.5 (based on expected earnings). In the past 20 years, it has only been higher during the post-coronavirus rally (P/E of 21). The risk of a bubble forming, provoked by hopes in artificial intelligence, is real. However, we believe that the peak has not yet been reached and are therefore going with the momentum.
Protective wall against inflation
In our portfolios, we are therefore selling small caps that are not making any headway and buying global equities with strong momentum in return. Sooner or later, however, the central banks' dilemma is likely to come to the fore again, as a strong economy combined with interest rate cuts will cause inflation to rise again.
On the other hand, significant cost reductions are necessary in order to maintain the high margins. We are therefore only slightly overweight in equities and are hedging against rising inflation expectations with inflation-linked government bonds and gold. We remain underweight in bonds, but are increasing the duration again following the recent rise in yields.