Horizon Q4│2024 - Equities

In a nutshell

Equity indices should still have moderate upside potential until the end of the year. However, we see this primarily following the US elections. Which regions and sectors will come out on top is likely to depend heavily on who emerges victorious in the elections and whether both US chambers are won by the same party.
Small caps offer the greatest seasonal potential and are also likely to be supported by falling interest rates. Overall, market breadth is likely to increase.

Mixed Q3 for equities

While the major share indices barely moved in the third quarter, there was a rotation below the surface. Tech stocks were among the relative losers due to a mixture of AI hype concerns and growth worries. The latter also weighed on commodity stocks. By contrast, defensive equity sectors were among the relative winners. In regional terms, this was reflected in the underperformance of Asian and US equities and the outperformance of UK equities. The relatively favourably valued small cap stocks, for which a lot of negative factors are already priced in, held up surprisingly well.

Mixed picture with regard to earnings expectations

Although fears of recession have recently increased, mainly due to disappointing US economic data, analysts have recently raised their earnings estimates for the next 12 months – especially for Asian equities and more defensive and interest rate-sensitive sectors. The property sector saw the most positive earnings revisions. However, earnings expectations, particularly for the US, appear very ambitious. Analysts expect earnings growth of 15% for US equities in 2025 – and this with a weakening US labour market and the threat of an economic slowdown. Accordingly, there is likely to be a tendency towards negative earnings revisions in the near future.

Tabelle Equities 1 EN — Time period: 16/09/2019–16/09/2024.

European equities with a high risk premium

The P/E valuation for the S&P 500 has risen again after the correction at the beginning of August and, at 21.3, is as high as it was last in October 2021. European equities, on the other hand, have become even cheaper in a historical comparison and are now trading at a historically high valuation discount of more than 37% compared to US equities at index level. There are various reasons for this. In addition to the different sector structure (more innovative and high-growth companies in the US), the higher potential growth and the lower and more flexible capital market in the US are also responsible for this. In addition, the US is more strongly supported by a higher proportion of valuation-sensitive investors (e.g. ETF savings plans). However, these non-new arguments probably only explain part of the valuation difference. Higher EU energy prices and Trump's possible victory in the US presidential election (and thus probably higher tariffs) also play a role. The positive aspect is that European equities are already pricing in a high premium for all these risks and offer opportunities should they not materialise.

S 9 1 E — Time period: 30/06/1989–16/09/2024.

Market breadth likely to increase further

While equity index performance was driven by a few, predominantly tech stocks until the summer, the picture has changed since July. More defensive and above all interest rate-sensitive stocks have recently been able to gain ground. Q4 performance is likely to be strongly influenced by the outcome of the US elections. If Harris wins the presidential election, this should also tend to favour non-US equities (more international cooperation, fewer tariffs, but higher US taxes). Trump, with his focus on the US and deregulation, would at least superficially be better for US equities and especially US small caps with a lot of domestic exposure. However, a large risk premium has already been priced in for European equities and especially small cap stocks. There could also be a familiarisation effect, as international investors now know better than eight years ago what to expect under Trump. If Trump actually succeeds in ending the war between Russia and Ukraine, Europe could also benefit from this (lower risk premium, lower energy costs). However, the implications for equity markets also depend on how many of the election promises are actually implemented – which in turn depends on whether a candidate takes over both US chambers or not. History shows that volatility is usually high before elections and declines sharply afterwards, regardless of who wins, as uncertainty disappears. We therefore see good opportunities for a year-end rally and believe small caps are likely to outperform, favoured by lower interest rates and positive seasonality.

Tabelle Equities 2 EN — * Average, consensus bottom-up as of 16/09/2024

What is on companies' minds?

Economic uncertainty

European companies in the renewable energy sector are benefiting from at least stabilising energy prices, and the prospect of falling interest rates is making new projects more attractive. In contrast, demand trends in the automotive industry remain difficult and are characterised by uncertainties surrounding the electric car. In the luxury sector, companies have reported a further sequential deterioration in trends in recent months, particularly in Asia, and the broad downturn continues. Although the semiconductor sector continued to benefit from the strong trends driven by AI and is seeing a further recovery in its core business, expectations regarding the strength and speed of this recovery have recently been revised significantly downwards. In contrast, the trends in the healthcare sector remain solid. Both the pharmaceutical and medical technology sectors have seen some increases in their annual forecasts. After two years of downturn and prolonged destocking, we are also seeing a clear recovery among companies in the life sciences sector. The de-stocking is coming to an end and incoming orders are growing compared to the previous quarter. As in other sectors, business development in China remains weak.

Matthias Born, CIO Equities