Despite their recent rebound driven by the decline in inflation, the stock markets remain at “preponderant downside risks”, warn the Desjardins economists in the update of their outlook for the financial markets and the economy.
“Although the economic context remains very uncertain, optimism seems to have prevailed (on the stock markets), favored by a certain 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 fairly well so far against moderating demand and rising input costs and borrowing costs. »
On the other hand, “several downside risks remain despite the (relative) low levels of valuation of stock market indices,” note the Desjardins economists.
“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 (sustainable) rebound in the stock markets as long as (corporate) profits do not record 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 & gas) to “an increasingly large 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 fluctuations in (oil) prices. For the other sectors of the Canadian economy (represented on the stock market), the outlook remains much less positive. »