The stock market promises excitement. In the course of the debate surrounding various macro-worries (rising interest rates/inflation, US customs tariffs, etc.) it has since the beginning of February been stuck in a rut. Thus, at its lowest point the DAX lost as much as 13% on its all-time high, the Euro Stoxx 50 no less than 11 percent; in terms of individual equities, the losses were in some cases far higher. However, of late there were few bad news items on the economic or corporate front, and selling seems to have tended to be “unspecific”. Many companies presumably do not suffer at all from the above-mentioned factors. Moreover, the feared scenario of a more intense trade war between the USA and China has not yet materialised. There is still confidence that both parties could find common ground in the pending rounds of negotiations. After all, we have often seen in the past that President Trump likes to initially adopt extreme negotiating positions but at the end of the day wants a deal. It is well-known, furthermore, that he likes to measure his popularity in terms of rising stock market prices and therefore probably has little interest in causing enduring damage to the US economy.
With corporate profits still rising, there is now a notable discrepancy between the market sentiment (poor) and the valuation (attractive). This should become manifest during the Q1 2018 reporting season, which is set to begin soon, and specifically as regards US stocks, where for the first time the full impact of the US tax reform of December 2017 should make itself felt. The DAX is attractive in this context and has of late closed well below our price target of 14,000 points for the end of the year. The DAX valuation on the basis of p/e ratios for 2019 is below 12 points, a markdown on the historical valuation average.