Despite their recent rebound driven by lower inflation, stock markets still face “overriding downside risks,” warn Desjardins economists in their updated outlook for financial markets and the economy.
“Although the economic context remains very uncertain, optimism seems to have prevailed [sur les marchés boursiers]favored by a number of good news, “note the economists of Desjardins in their analysis published Tuesday morning.
“The decrease in US inflation observed in October” as well as “the first signs of an upcoming moderation in the pace of interest rate hikes by the Federal Reserve (Fed)” were well received by stock market investors.
Also, “corporate earnings are holding up quite well so far against moderating demand and rising input costs and borrowing costs”.
On the other hand, “several downside risks remain despite the low levels [relatifs] valuation of stock market indices”, note the Desjardins economists.
Fall in profits
“First, a context of high interest rates justifies lower valuation levels of securities listed on the stock exchange. Corporate profitability requirements are raised as money and bond market returns become more attractive. »
Then, according to Desjardins economists, “we should not therefore expect a strong rebound [durable] scholarships […] as long as the profits [des entreprises] do not register a significant increase”.
However, “it is rather the reverse that should occur. The slowdown in the economy, combined with a moderation in inflation, could lead to a drop in corporate profits,” the Desjardins economists anticipate.
As for the Canadian stock market in particular, they point out that the recent positive return performance of the S&P/TSX market index is mainly attributable to the fact that “the maintenance of oil prices at high levels” has pushed the sector of the energy (oil and gas) to “an increasing share of corporate profits in the S&P/TSX index”.
Consequently, according to Desjardins economists, “the large surpluses of oil companies provide support for the value of the S&P/TSX index, but they also increase its volatility in the face of price fluctuations. [du pétrole]. For other sectors of the Canadian economy [représentées en Bourse]the outlook remains much less positive”.