Equities: Valuation reset underpins new highs – Danske Bank
Danske Research Team observes US equities extending their rebound, with the S&P 500 and Nasdaq posting fresh record highs and cyclical laggards leading gains. The team argues markets are not excessively optimistic, noting valuation multiples have compressed over the past year and quarter.
Danske Bank's research team highlights recent advancements in US equities, with the S&P 500 and Nasdaq achieving new all-time highs. These gains are attributed to cyclical sectors outperforming, as valuation multiples have decreased over the past year and quarter. The team asserts that the market's optimism is justified, as earnings growth remains the primary driver of equity performance despite headwinds from energy and interest rates.
Although geopolitical tensions, high oil prices, and rising bond yields pose challenges, the S&P 500 has already shed approximately 20% of its valuation multiple over the year, becoming 5% cheaper in the last quarter. Consequently, the team disagrees with the notion of overly optimistic markets, as they perceive current market valuations to be reasonably conservative.
Equity, credit markets, and bonds have exhibited varied reactions in recent weeks, indicating distinct factors at play. For equities, future nominal earnings growth is the key determinant of broad equity performance, provided investment returns continue to outpace the discount rate.
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