For equity investors, July ended on a euphoric note, with the Stoxx Europe 600 up 7.6%, following in the wake of the CAC 40 and S&P 500, which both rose 9%.
The equity markets were buoyed by the easing of interest rates (and commodity prices), as illustrated by 10-year US sovereign rates, which dropped from nearly 3% to less than 2.6%. Lower interest rates revived growth stocks for the month, which gained more than 11% compared to only 4% for value stocks.
But investors were also reassured, on the whole, by earnings reports that demonstrated the resilience of a certain number of business models, not only in cyclical sectors (the share prices of Renault and Stellantis surged 20% and 16%, respectively, lifted by higher margins) but also for certain tech stocks like Apple, which announced higher-than-expected earnings as services offset poor hardware sales, which were hard hit by shortages for certain components. The luxury goods sector also stands out, where the family-owned Hermès group reported first-half sales growth of nearly 30%.
Analysts wanted to make sure that companies had the capacity to limit the negative growth/inflation scissors effect, or in other words, that they could preserve their end customer base while passing on higher prices. Economic forecasts, in contrast, provided no equity market support: once again, the IMF downgraded its world growth outlook to 3.2% in 2022 and 2.9% in 2023, with a growth rate of only 3% for China, which would be its weakest performance in 40 years. Numerous risks are still overshadowing the equity markets, from health risks to geopolitical and economic risks. They explain the year-to-date 15% decline in global equity markets at the end of July (World MSCI index in USD). Uncertainty and volatility are still dominating the headlines.
At Clartan Associés, the ultimate arbitrator remains the workings of the companies in which we are invested and their ability to withstand cyclical shocks. Our job is to detect the players who are best armed, and to discern their true value. With regards to equity prices, the current ongoing popping of speculative bubbles (cryptocurrencies, bonds, tech stocks) lends credibility to our fair price approach. One virtue of an equity market correction is that it heralds the return to reasonable, justifiable valuations.