(Boursier.com) – Why do US stock markets fall in October, although the results of third-quarter companies in Europe and the United States are well above analysts' expectations? Is this the beginning of a broad correction, or even a bass market, or a simple break in the biggest increase in the history of Wall Street, which lasted 9 years and 7 months now? United States?
The answer to this question will depend on many factors, including trade tensions between the US. UU. And China, the Fed's monetary policy and the results of mid-term elections in the United States, which will determine Donald Trump's ability to pursue its reforms, notably its infrastructure renovation program.
Technology closed markets in October
In October, Wall Street had its worst month in seven years, with a 5% decline Dow Jones, 7% for the S & P 500 and 9.2% for the Nasdaq Composite, rich in technological actions, the latter benefitting for several years due to a sometimes dizzying increase. For the Nasdaq, this October it was until the worst month for 10 years, in November 2008, in the midst of the "subprime" credit crisis …
A group of 6 giants of the internet (Facebook, alphabet, apple, Amazon, Microsoft, Netflix) still rose 13% in October, according to Refinitiv, despite global results higher than expectations in the third quarter. Investors penalized the slightest difference, albeit small, compared to forecasts and, in particular, they were sometimes disappointed by the forecasts of these companies, including Amazon and Apple, who were cautious for their sales at the end of the year.
The benefits increase by 25% from Q3 2017
However, of 74% of S & P 500 companies that now published their accounts for the third quarter of October, 78% of them made better than expected in terms of benefits, and 61% recorded gains above expectations. , according to statistics owned by the company Factet (Dow Jones group). The average increase in earnings per share is close to 25% (24.9%) compared to the same period of 2017 that, if this figure is confirmed for all S & P 500, it will represent the best performance from the 3rd quarter of 2010, according to Factset. At the end of September, the consensus of the analysts was that the "S & P 500" would rise by 19% in Q3 2018.
Regarding the forecasts for the fourth quarter, they did not deteriorate in the vast majority of cases. However, analysts have noted some concerns, as so far, 46 S & P 500 companies have revised their Q4 forecasts, while only 24 reviewed them up, other companies have not changed their prospects.
A sharp decline in profit growth in 2019?
Stock market investment is not motivated by past data, but by expectations of future earnings per share, so investors seem to believe that the company's profits must significantly reduce its increase in 2019 … The future will tell if the Markets have reason to worry, but at the moment it is seen that the risks accumulate in the coming quarters, from increases in business costs related to the increase in customs barriers and rising raw materials prices.
In addition, the rise in interest rates, led by the Federal Reserve, increases the financial costs and increases the costs of the loan, which will also reduce the benefits. Finally, the corporate tax cuts applied by Donald Trump in 2017 are now being digested, reducing the positive base effect that its implementation had in the first two years.
For 2019, the asset manager Blackrock Still waiting for a year still marked by a positive environment for the benefits of business. The consensus of analysts still expects a growth of 10% of profits in 2019, after an increase of about 20% in 2018. Some analysts are less optimistic, especially those of Morgan Stanley, which provides a limited gain of 5% in earnings per share next year. This important slowdown is particularly related to the policies of the Fed and other central banks that "have strengthened their monetary policy more than the market (and possibly the economy)," analysts at the US bank said.
Wall Street generally progresses the following year to "midterms"
In the short term, markets have their eyes reflected in the results of midterm elections in the United States, where Donald Trump's failure (for example, the loss of the Senate) would be very noticeable, because Democrats would be postponed. This is the reason for which the Trump tax cuts continued and its vast infrastructure renovation project in the US is being reduced.
According to the statistics compiled by the website, RiskHedge Report, released Tuesday by Marketwatch, since 1946, there were 18 midterms and US stocks increased in the 12 months following each of the elections. And what an increase, as it reached on average … 17% from 12 months, and up to 32%, if we take as a reference the "midterms" lower of the year …
However, other statistics moderated this optimism: according to the firm Fundstrat Global Advisors, which studied the markets since … 1896, the average market increase was only 1.9% when the president's party lost a majority in the House of Representatives ( the most likely case for Trump). When the party of the president conserved his majority in the house, the increase was almost 17% in the 12 months following the elections.
The great fear of a commercial war between Washington and Beijing
Beyond Fed's monetary policy and prospects for profit, the stock market developments will continue to be guided in the coming weeks by trade talks between the United States and China. In case of failure that leads to a large-scale commercial warfare, stock markets would undoubtedly be significantly lowered, given that the US. UU. And world economies will probably suffer, which in turn could lead to the Fed pause in its monetary adjustment cycle.
The last echoes of China, but also of Washington, seem to indicate the desire to reach an agreement. The president of EE. Donald Trump is scheduled to meet with his Chinese counterpart Xi Jinping at the end of the month in Argentina outside the G20 summit in Buenos Aires.
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