The positive part left by the falls that have been prevailing for most of the year in the stock markets is that they have become cheaper. However, these falls have not translated into a snip in the profit estimate of the main indices, with the added bonus that they are bought at some of the cheapest prices in the last decade. Since mid-July, on the other hand, and although the situation remains complex, many of the stock markets have recovered part of the lost ground, with increases of around 2.5% in the United States this month, given the expectation, still to be seen, of that inflation may have peaked.
This rally in the indices has made their respective earnings multipliers slightly more expensive and, by extension, has lowered the return that an investor now aspires to in both markets. With the benefits expected for this year, a portfolio invested 100% in European equities opts for a return of 8.1%, and one invested in the American stock market at 5.4%. In other words, a lower return than what they offered in previous months, with 8.6% for the Stoxx 600 in July and 6.1% for the S&P in the same month, but still one of the highest returns in the last decade and without rival in other types of assets, such as fixed income, where only junk bonds offer similar returns.
That 8.1% of the Old Continent index and 5.4% of the American index is reached by calculating the inverse of the PER of the Stoxx 600 and the S&P500; a calculation used to measure the return that can be expected from an investment. In this way, someone who invests 100 euros in the European stock market today would take 13.1 years to recover their money (that is, to generate another 100). From there it can be deduced that the index offers an annual return of 8.1%, a figure that is obtained by dividing those 100 euros by 13.1 years -below its average PER of the last decade, which stands at 15, 4 times and also below the profit multiplier at the beginning of the year, which was established at 15.8 times, according to data from Bloomberg.
The reduction in prices that the index has experienced compared to its average for the last decade is due, however, to the string of setbacks that it has had to digest since the beginning of the current year.
And it is that, the energy and supply chain crisis was followed by the outbreak of a war in the West without precedent since 1939. A cocktail that further raised the inflation that had threatened since the beginning of the year in different parts of the world, reaching to register, last June, 9.1% in the United States, levels not seen since November 1981. This scenario has led the central banks on both sides of the Atlantic to execute an attempt to control the runaway rise in prices. Therefore, a backdrop that has not made it easy for the stock markets, with the Stoxx 600 and the S&P registering losses of around 10% in the calculation of the year.
Thus, the case of the S&P 500 is not the same, since, unlike the European, it is not trading cheaper per PER than in the last decade. Specifically, the analysts’ estimate, if the profits of 2022 are taken into account, is 18.8 times, compared to 18.2 times on average in a decade and 16.7 times in the last 20 years, according to the consensus of analysts collected by Bloomberg. However, the American thermometer now offers a PER four points cheaper than in January, when it was bought at 22.6 times. This implies that the expected return of this index has also grown since the beginning of the year.
Thus, and despite the complicated environment, the stock markets on both sides of the pond demonstrate their own idiosyncrasies with a more satisfactory presentation of results for the second quarter of the year than was predicted. “Expectations for the second quarter results were not good, but finally the data has been better than expected, since the S&P500 is set to present earnings growth of around 9.2%, and so far, the 77.5% of companies have beaten expectations,” explains Josh Gilbert, Market Analyst at eToro. Thus, the expert adds that: “Investors are optimistic about the possibility that profits can weather this toxic mix of inflation, hawkish central banks and a possible recession, and that has put the wind in the sails of the US markets. “, finishes.
In this sense, Alexander Londoño, market analyst at ActivTrades, expresses that “in the United States and Europe, the main stock market indices are in important resistance zones that should break upwards if they want to continue rising. The next data Inflation and employment on both sides of the Atlantic is what would determine whether stocks continue to rise or fall back.
In order to know the expected return of the stock market as a whole, it is necessary to calculate the average of the expected return of the European and American benchmarks at 12 months. Thus, a person who is 100% invested in both markets would currently expect a return of 6.7%. This figure varies according to the profile of the investor, since, for those who have a mixed portfolio invested 90% in the stock market and the other 10% in other assets, they would achieve 6.3% only with the variable income part (see graph).
Potential and good recommendation
In the list of almighty stocks on this side of the pond, among those with the highest market capitalization, with the best recommendation and the most potential, the luxury conglomerate LVMH is in the lead by market value. The company, which has not reached the green this year and is left over 2%, has a buy recommendation – the third best advice among the giants, and has seen an increase in the profit estimate of 18% since the beginning of the year. However, Sanofi is the one that offers the best potential, with 40.6%.
With the same characteristics, but on the other side of the Atlantic is Apple, which although it has not managed to enter the positive territory this year either, with around -1%, it also sees its profit forecast for this year increased by more than 6% and raise the buy sign. Thus, in this case, Meta Platforms, formerly Facebook, is the one with the best upside potential, with a rise of 22.8%.
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