Equity market indices have risen impressively in the recent period. Some investors are concerned about this rise in share prices and fear a downward correction. Analysts at Natixis believe that on the contrary, equity markets will continue to rise.
Corporate profit margins are very high
“Despite the rise in the prices of commodities and companies’ intermediate consumption and, in the US, rising labour costs, corporate profit margins and earnings are very high. In Europe, labour costs are not accelerating, while companies in the US are able to pass on increases in their costs to their selling prices. So given the downturn in the prices of many commodities, profit margins will remain high.”
Long-term interest rates will remain low, well below growth rates
“The Federal Reserve has decided to reduce the size of its Treasury purchases, but will not raise the Fed Funds rate until 2023. Given, moreover, that it is the size of the central bank’s balance sheet that determines long-term interest rates, long-term interest rates will remain low in the US. The ECB will continue its bond purchases in 2022 and will not raise its key interest rates until 2024. The ECB appears to have no intention of exiting its highly expansionary monetary policy. Long-term interest rates will therefore remain much lower than growth rates for at least another two years.”
Abundant liquidity remains to be invested in equities
“After a period of vigorous money supply growth, portfolio rebalancing is complete once the proportion of money in wealth has returned to normal. As long as the proportion of money in wealth is abnormally high, the prices of the other asset classes that make up wealth (including equities) will continue to rise.”
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