Weekly Brief: Markets Look Refreshed This Year, But They May Tire Again Soon

Global markets have started this year off with a fresh glint of hope in their eyes, but investors should remember that even the best of intentions can disappear when times get tough.

🕰 Recap

• Goldman Sachs said the outlook for European economies seems perkier all of a sudden, and raised its forecast for the bloc’s economic growth on Tuesday
• But the outlook for the bank itself wasn’t as sunny, with Goldman announcing the firm’s biggest set of cost cuts since the financial crisis on Wednesday
• Meanwhile the US had reason to celebrate on Thursday, with the latest inflation data showing that price rises cooled again

✍️ Connecting The Dots

It seems like the world’s financial markets woke up on January 1st and decided to put all of last year’s bad news behind them. For starters, the unseasonably warm weather – and the lower energy usage and prices that followed – put a spring in the step of major European and UK stock markets, which are now within spitting distance of all-time highs. And across the pond, bullish US investors have whispered of a goldilocks economy, where inflation’s not too hot and growth’s just right – a fairytale for stock prices, in other words.

But as anyone on a New Year-inspired juice cleanse knows, January’s optimism doesn’t always last the whole year. Investors, then, will want to keep a close eye on market sentiment. Right now, the prevailing word is that the US economy will avoid a crash landing. But if that prediction gets even sweeter, and folk expect the US to touch down softer than a butterfly with sore feet, then you’ll want to prick up your ears. After all, the last few years have taught us that sentiment is a very fickle beast – and when it changes, stock prices can follow suit.

Now, the good news could just keep rolling in, of course. But if history’s any guide, that’s pretty unlikely. Stock prices, then, could be stuck in a constant swing this year, moving up and down whenever the news switches direction. That means investors might need to update their mantras: “buy the dip” did the trick during the upward-marching markets that followed the pandemic’s crash, but you might want to add “sell the rally” to your 2023 vocab.

🥡 Takeaways

1. Sweet dreams, investors.

There’s one topic keeping US stock bulls up at night: no, not the fear of broken alarm clocks – valuations. They’re right to be paying attention: economic data might be slotting into place for now, but traditional metrics like the price-to-earnings ratio (P/E) are valuing stocks at a pretty average spot, relative to their long-term history. That means if any meaningful rally comes along to pull up stock prices, it’ll push those valuations higher too – and that would likely put a ceiling on any possible gains. But for stocks to look cheaper valuation-wise, there are only two options: a market fall, or an uptick in companies’ profit – that’s used to produce that key ratio, remember. No prizes for guessing which one investors are rooting for.

2. Earnings season comes but four times a year.

US firms go under open surgery every quarter, with their results, strategies, and leaders’ statements laid out on the operating table. See, while economic forecasts keep the headlines busy, corporate profit is where the rubber meets the road for stock prices. And while every reporting season seems more important than the last, fourth-quarter results are usually when CEOs present their yearly outlooks – so the upcoming results season’s a genuine biggie. Time will tell whether the recent shift in market mood has worked its way into their psyches…

🎯 Also On Our Radar

Wall Street can be more dramatic than Hollywood – well, if you’re into finance, that is. Just check out the unfolding prize fight between Nelson Peltz and Disney: Peltz’s last proxy fight – aimed at a boardroom seat at Procter & Gamble – was a classic, so any investor worth their salt will want a ringside seat at this blockbuster.