Pride comes before the bang – Is the summer rally coming to an end?

Fed Chairman Powell drove US equities to record levels this week. The first rate cuts by the US Federal Reserve since the financial crisis are imminent. These could actually become necessary, as the trade dispute between Washington and Beijing leaves its mark on the global economy. This can be seen worldwide in the early economic indicators and in Germany in the figures for listed companies. German companies publish profit warnings almost daily, especially companies from the cyclical sectors of semiconductors, mechanical engineering, chemicals and automobiles.

The outlook for a continuation of the worldwide loose monetary policy should lead in the medium term to a revival of the so-called „Tina“ trade (there is no alternative) on the stock market.
Investors will continue to try to escape the „underworld“ of negative interest rates in the bond market and generate income from real estate and equities. Dividend strategies should remain in high demand on the equity market, as should securities from defensive sectors. There is not much to criticize about this strategy per se, as it usually makes portfolios more robust. However, the valuation of defensive stocks has already risen sharply.

The marginal utility of declining interest rates has been diminishing for companies in recent years. The lower interest rates on the use of funds (including dividend payments and share buybacks) and the general mood on the markets have a stronger impact than on the business plans of companies. In the medium term, we expect that the impact of the current hysteria of interest rate cuts will escape from the equity market again.

Neither the earnings outlook for companies nor stock market valuations support a further rise in the indices. This applies particularly to the US equity market, whose weak earnings momentum is borne almost exclusively by securities from the technology and banking sectors and whose valuation is increasingly hitting historical upper limits.

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