Pictet Asset Management
With corporate profit growth at remarkably healthy levels, we expect the stock market to add to its strong gains over the coming months.
Asset allocation: earnings growth too powerful to ignore
It makes sense to ask whether stocks can add to the double-digit gains they have delivered so far this year in the face of a steady increase in government bond yields.
Rising yields lead to higher commercial borrowing costs and also reduce the present value of future corporate earnings, developments that normally weigh on equity markets. But concerns surrounding the sustainability of the stock rally look overdone, in our view.
There are strong reasons to believe equities will continue to rise over the next few months. The main argument for maintaining our overweight stance on stocks comes down to corporate profitability. Earnings are still growing at a remarkable pace, thanks in part to the broadening adoption of new technologies such as AI. According to analysts’ consensus forecasts, company profits are set to grow 30% this year; we believe they could increase at an even faster rate, by some 35%.
Also in stocks’ favour are economic conditions.
While the rise in bond yields can be partly attributed to a build-up in inflationary pressures and stubbornly high public-sector deficits, it is also the case that fixed-income markets are discounting reasonably healthy levels of economic growth. Indeed, as history shows, rising bond yields aren’t always associated with declines in equity markets. It all depends on why yields are rising in the first place. When bonds sold off during periods when the economy was performing well, as was the case in both 1994 and 2013, equity markets did not suffer declines.
