Equities to struggle to make major further gains – Deutsche Bank

Earnings estimates have been revised up on the back of Q1 2021 gains and valuations look sustainable as long as real yields remain negative. But economic recovery looks already largely priced in and rates rises will cap future valuations gains. The prospect of rising interest rates is also leading to a reassessment of sector preferences, as reported by Deutsche Bank.

Equity markets may be moving beyond a range of "peaks" and into a rather less policy supported investment landscape

“Increasing commodity and other input prices will hit firms’ profit margins if they are not able to pass them on fully to consumers. Underlying all this, there will be a sense that we are moving beyond a range of ‘peaks’ (e.g. in economic momentum, fiscal stimulus and liquidity) and into a rather less policy supported investment landscape.” 

“As we have seen, a really rather good Q1 2021 earnings season only just about kept markets happy: we need more reassurance from Q2 and Q3 earnings.”  

“At a style and sectoral level, market preferences are shifting back and forth as uncertainty continues. At this point, a barbell approach including both growth and selected cyclical stocks looks appropriate. Rising interest rates may dent the relative appeal of tech stocks – due to discounted future earnings – but their long-term importance remains.”

“End-June 2022 S&P 500 forecast 4,200”