The first weeks of the year have been complicated for the trading of Wall Street indices. Those first stages were marked by falls, although this Wednesday they managed to turn around on the hardwood and get out of negative territory. At times, at the close of the European session, the S&P 500 managed to register a 1.2% increase so far this year. Analysts expect that continue to increase your profits in 2025, although a higher multiplier than usual is already paid for them. The index is trading with a PER (the number of times the profit is included in the share price) of 21.9 timeswhich represents a premium of 22.7% with respect to its multiplier of the last decadewithout taking into account 2020 marked by Covid-19. An increase in prices that means that the US index is installed in bubble territory (when paying a premium greater than 20%), something that It only happens 20% of the time.
Although if the anomalous year of the pandemic is taken into account, this entails a premium of 6.9% this year. On the other hand, the continental reference, the Stoxx 600, is currently trading with a P/E of 14.3 times today, which means that The selective of the Old Continent has a premium that exceeds 5%quite distant from the levels of its counterpart on the other side of the Atlantic. While its average for the decade reaches 20.48 times, and considering the pandemic period it has a discount of 9.3%.
The US market is largely overvalued due to earnings growth expectations for companies in this region, along with the new US president. From the point of view of the CIO Core at AXA Investment Managers and president of the AXA IM Investment Institute, Chris Iggo, “no other major stock market comes close to America’s current valuation level“.
For Iggo, “the valuation is not a guarantee of future returns”, but “lInvestors maintain a positive view on US equitiesas earnings growth is expected to be 14% over the next year and President-elect Donald Trump’s political agenda looks favorable. However, “A valuation adjustment is a risk if fundamentals or sentiment deteriorate rapidly.”.
Rotation to fixed income
From AXA Investment Management they point out that “other assets are cheaper than US stocks, including European and Asian equities.” Iggo adds, “More importantly, US Treasury bonds. Like other government debt securities, Treasury bonds have become cheaper in terms of relative value versus swaps and corporate bonds. A rapid rotation from stocks to bonds could be one of the big surprises of 2025.”he points out.
Last week fixed income investors lived cold sweats with the increase of bond yields. American debt In 10 years it climbed to the threshold of 4.8%given the risks of higher inflation in the region due to the positive employment data in the US. ANDThis led investors to rule out the Federal Reserve cutting interest rates until after the summer, although forecasts now point to July. Another focus of concern is the new president of the United States.
Despite the euphoria that Trump generated and continues to generate, his return to the White House this coming Monday worsens the outlook for inflation in the region. Schroders economists George Brown and David Rees say that “although an aggressive Trump could try to offer large fiscal stimulus, stronger demand would quickly collide with a deterioration on the supply side. Despite being partially absorbed by the dollar stronger and profit margins, substantially higher tariffs would probably increase commodity inflation“.
“The biggest threat to inflation probably comes from an immigration restrictionalong with mass deportations, which could lead to a labor shortage that would ultimately translate into an increase in wages and inflation in services,” they explain from Schoders. And experts predict that ” Financial markets could price in these extreme policies later in 2025, even if they never materialize. which would cause an increase in volatility across all asset classes“.
This Wednesday, precisely an inflation data (slightly better than expected) has led bond yields to fall to 4.65%, which seems to show a new path for investors towards fixed income. Although inflation rose two tenths to 2.9% year-on-year, the underlying data fell one tenth, to 3.2%, the first decline in the last six months.
This meant for the market a happiness unexpected, which together with the good corporate results of the American banks, has managed to turn around the Wall Street price and put it in positive territory for the year. As mentioned previously, the S&P 500 achieves a 1.2% annual increase, a figure it shares with the New York technology index, the Nasdaq 100. On the other hand, the Dow Jones industrial selective index is the most bullish in terms of this year, with a 1.7% increase.
On this side of the Atlantic, Europe is still ahead of the US in the rises of 2025. The EuroStoxx 50 is the most bullish index of the year, with a rise of 4.3%, followed by the German Dax, which adds a 3.8%. Meanwhile, the Cac 40 has managed to advance 3.4% boosted by the latest results of luxury companies, its most influential business and which entered a crisis during 2024 due to the weakness of its sales in China. Meanwhile, the Ibex 35 was relegated, although it has advanced 2.1% so far this year.
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