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It’s the earnings outlook, stupid!

Old worries are currently returning to the capital markets in concentrated form. Geopolitical tensions between China and the rest of the world are on the rise again (even without Donald Trump), and the blockage of the Suez Canal shows once again how vulnerable value chains are.

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Key takeaways:

  • Investors increasingly focus on old worries driven by current events.

  • Equity markets continue to rise to fresh highs because the earnings outlook ultimately matters.

As the pandemic enters its third round, the German Constitutional Court reminds all those who have already forgotten of the fiscal risks facing the European Union. The hedge funds getting into trouble are reminiscent of LTCM and the outbreak of the Asian crisis. In addition, inflation jitters have risen from the dead. At the same time, important stock indices are rising to new all-time highs. How does all this fit together? As for the pandemic, markets are taking the liberty of looking around the corner. The vaccination campaign makes the end of the pandemic seem foreseeable and the economic risks manageable. The players in the European Union are likely to get their act together one way or another and the bottlenecks in the Suez Canal also appear to have been resolved for the time being. The trade dispute did not escalate with Trump and should therefore not get out of control without Trump. The US hedge fund imbalance is a problem for the banks involved, but according to what we know so far, it is too small to pose a problem for the capital market as a whole.

Concerns about permanent inflation seem premature
Wage growth is under control in both the US and Europe. Structural factors such as technological progress should also help to keep inflation risks under control in the future. Those concerned about rising yields on US bonds should take a look at bond yields outside the US. About 70% of the bonds in the Barclays Global Aggregate Index have yields below the current 10-year US bond yield of 1.7%. Any further rise in US yields is likely to be seen as a buying opportunity by investors outside the US.

Conclusion for investors
Consequently, there should be no lasting disruptive fire for the equity markets from this side. Investors are therefore focusing on the growth prospects for the second half of 2021, which continue to be positive – or put differently: equities are rising against a wall of worry.

Note: Research Weekly returns on 12 April due to the Easter holidays.

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