Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 25/11/24
US equities have outperformed their euro area peers by +22% over the past year
US corporate profits are expected to grow at an annualized rate of about +12% in 2024 and 2025, far outpacing the 50-year historical growth rate of +6%. These lofty expectations are based on pro-growth policies by the incoming Administration, on top of robust real GDP growth in 2024 (+2.7%).
US companies will need to deliver strong EPS growth in order to sustain and justify elevated equity market valuations. The ratio of equity prices to expected 12-month earnings has been in the upper end of its long-term range (22.2x versus a mean value of 16.0x since 1987).
Profitability has supported US equity market exceptional performance year-to-date (+25%). At the same time, euro area equity markets (+5%) have underperformed by a wide margin due to lackluster 2024 EPS growth (+1%) and heightened political uncertainty.
Euro area PMIs provided fresh fuel to economic concerns. The composite index fell by -1.9 pts mom to a 10-month low of 48.1 in November, below the expansion/contraction threshold of 50.0. Both the manufacturing (-0.8 pts to 45.2) and the services PMI (-2.4 pts to 49.2), disappointed. Country-wise, German (composite PMI: 47.3) and French (44.8) PMI indices moved lower.
Germany’s real GDP has stagnated since Q1:2022. According to the German Council of Economic Experts, Germany’s GDP (30% of euro area) will decline by a second consecutive year in 2024 by -0.1% (a -0.3 pps downward revision versus respective estimates 6 months ago) after a -0.3% in 2023, whereas real GDP growth is projected to increase slightly in 2025 (+0.4%).
Euro area economic growth concerns have fed through to investors’ expectations for a more dovish ECB. According to EUR overnight index swaps, c.-160 bps rate cuts are priced-in by end-2025. Recent ECB commentary has also been viewed as suggesting a dovish tilt, with Executive Board member and Chief Economist Mr. Lane citing that policy “should not remain restrictive for too long”.
In that context, euro area market rates moved lower in the past week (10-year Bund: -10 bps to 2.25%) and the euro lost ground by -1.2% wow against the US Dollar to a 2-year low of €/$1.041.
Having said that, as pockets of consumer price pressures remain especially in services, a significantly weaker exchange rate could contribute to inflation pressures. Attention now turns to November’s euro area CPI due on Friday, with a substantial acceleration of the headline’s annual growth being expected, by +0.4 pps to +2.4% yoy, albeit due to a lower base of comparison for energy prices as well as negative base effects also for the core index.
Euro area bank stock prices declined by -3.8% in the past week due to concerns vis-a-vis profitability in the likelihood of significantly lower-than-expected policy interest rates, while the current week commenced with some volatility, following a surprising all-share offer worth 10 billion euros ($10.45 billion) from UniCredit (-5% on Monday November 25th) towards Banco BPM (+5%).
Finally, Mr. Bessent, has been tapped by Mr. Trump to lead the US Treasury Department. Following the news, US Treasury bond yields edged significantly lower on Monday November 25th by c. -10 bps in the 10-year tenor to 4.29%, possibly discounting a conventional fiscal policy.
US corporate profits are expected to grow at an annualized rate of about +12% in 2024 and 2025, far outpacing the 50-year historical growth rate of +6%. These lofty expectations are based on pro-growth policies by the incoming Administration, on top of robust real GDP growth in 2024 (+2.7%).
US companies will need to deliver strong EPS growth in order to sustain and justify elevated equity market valuations. The ratio of equity prices to expected 12-month earnings has been in the upper end of its long-term range (22.2x versus a mean value of 16.0x since 1987).
Profitability has supported US equity market exceptional performance year-to-date (+25%). At the same time, euro area equity markets (+5%) have underperformed by a wide margin due to lackluster 2024 EPS growth (+1%) and heightened political uncertainty.
Euro area PMIs provided fresh fuel to economic concerns. The composite index fell by -1.9 pts mom to a 10-month low of 48.1 in November, below the expansion/contraction threshold of 50.0. Both the manufacturing (-0.8 pts to 45.2) and the services PMI (-2.4 pts to 49.2), disappointed. Country-wise, German (composite PMI: 47.3) and French (44.8) PMI indices moved lower.
Germany’s real GDP has stagnated since Q1:2022. According to the German Council of Economic Experts, Germany’s GDP (30% of euro area) will decline by a second consecutive year in 2024 by -0.1% (a -0.3 pps downward revision versus respective estimates 6 months ago) after a -0.3% in 2023, whereas real GDP growth is projected to increase slightly in 2025 (+0.4%).
Euro area economic growth concerns have fed through to investors’ expectations for a more dovish ECB. According to EUR overnight index swaps, c.-160 bps rate cuts are priced-in by end-2025. Recent ECB commentary has also been viewed as suggesting a dovish tilt, with Executive Board member and Chief Economist Mr. Lane citing that policy “should not remain restrictive for too long”.
In that context, euro area market rates moved lower in the past week (10-year Bund: -10 bps to 2.25%) and the euro lost ground by -1.2% wow against the US Dollar to a 2-year low of €/$1.041.
Having said that, as pockets of consumer price pressures remain especially in services, a significantly weaker exchange rate could contribute to inflation pressures. Attention now turns to November’s euro area CPI due on Friday, with a substantial acceleration of the headline’s annual growth being expected, by +0.4 pps to +2.4% yoy, albeit due to a lower base of comparison for energy prices as well as negative base effects also for the core index.
Euro area bank stock prices declined by -3.8% in the past week due to concerns vis-a-vis profitability in the likelihood of significantly lower-than-expected policy interest rates, while the current week commenced with some volatility, following a surprising all-share offer worth 10 billion euros ($10.45 billion) from UniCredit (-5% on Monday November 25th) towards Banco BPM (+5%).
Finally, Mr. Bessent, has been tapped by Mr. Trump to lead the US Treasury Department. Following the news, US Treasury bond yields edged significantly lower on Monday November 25th by c. -10 bps in the 10-year tenor to 4.29%, possibly discounting a conventional fiscal policy.