Global stock markets are on something of a tear lately. The S&P 500 has gained another 6% in April, placing it slightly above the 4,200 level. it’d be tempting to think that stock markets could still rally alongside them but economists at Capital Economics think returns over the subsequent few years are likely to prove more tepid, for 3 key reasons.
Stock markets to ascertain smaller gains over subsequent few years
“We suspect that the boost from valuations has now run its course. the important yields of long-dated safe assets have risen since the beginning of this year, and that we expect them to resume their earlier upward trend. Meanwhile, credit spreads have leveled off around their pre-pandemic levels, and appear unlikely to narrow much further. this means to us that further gains available markets will need to be driven by earnings growth, instead of by multiple expansion.”
“We think tons of optimism about those earnings looks already baked into stock prices. After all, the consensus analyst forecast for full-year earnings in 2022 is nearly 30% above actual earnings were in 2019. this means to us that there’s limited scope for further earnings surprises to support the stock exchange over the subsequent year, notwithstanding our very positive forecasts for the US and global economies. Indeed, the very rapid profit growth on display within the current US reporting season appears to not have boosted the general stock exchange by all that much.”
“We think various shifts in policy have the potential to slow listed companies’ earnings growth. The prospect of upper corporate taxes within the US may be a clear candidate. and therefore the increasing focus of regulators on anti-trust issues, both within the US et al., is another.”
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