Fed, the new forward guidance drives the equity markets

The change of the American central bank in terms of inflation control could favor a further increase in equity. The spotlight is also on the inflation linked

The American reporting season officially closed with profits that, in 85% of cases have been surprisingly, now all the attention is towards Fed. Or rather, towards the new forward guidance regime adopted by the central bank on the inflation theme which, despite the recent unprecedented fiscal and monetary stimulus, continues to remain below the target of 2%. The Federal Reserve will no longer move forward in attempt to "control" the cost of living, but only in retrospect, watching and analyzing the evolution of the situation. Specifically, the Fed will monitor inflation movements over the past 2 years and then will decide how to move in terms of monetary policy. A "new" regime that, however, still leaves the central bank an ample room to maneuver in stimulating the economy, and which, according to the latest Pharus Management Committee, will result in a possible increase in inflation, over 2 percent. A scenario that the market is already priced at, with inflation linked bonds that are doing very well. And this also explains the good performance of the Pharus Sicav Absolute Return, given that a 10% of inflation has been added to the portfolio. During the last month, the fund gained 1.32%, while from the beginning of the year the performance has been at + 4.61%.

All in favor of equity, from profits…

Despite the strong rises recorded from the minimums in March (and an upward trend that has been underway for 10 years), the basic scenario remains in favor of the equity market. There are many drivers that can be seen on the horizon, starting with the Fed's new forward guidance regime in terms of inflation. And then there are the quarterly results of the American reporting season which has just ended, with 85% of the companies beating expectations. In particular, the S&P 500 record-ed an average decline in earnings of 33% in the second quarter. Indeed, resulting in a negative out-come, but better than the -45% initially estimated. The best performing sectors were utilities, with profits growing by 9%, healthcare (+ 7%) and technology.
For now, US earnings expectations for 2020 are -21.5%, while in Europe a drop of 34.3% is esti-mated. ButPharus Management Committee remains confident and optimistic in regards to the earning sentiment, which means the difference between upgrades and downgrades on profits. When the line goes up it means that analysts are "upgrading" more and therefore have a positive view. US earning sentiment is on the rise and now travels around 10%. Europe is still in negative territory, but the curve is positively inclined and could follow the fate of America.

…to macro data

Even from a macro point of view, everything seems to be in favor of the equity market. The data released in recent weeks have positively surprised the market, exceeding analysts' expectations. What matters is the expectations and when expectations are beaten, it is always very positive in terms of price dynamics. The fact that the relative valuations of shares with respect to bonds are at the highest in history is a testimony that equity remains the most interesting asset class. To complete the picture, there are the dynamics of flows, which show a strong interest in the money market. This means that, in the last few months the stock market has risen with a very low participation of investors. And if an interest in equity was about to increase, then we could see a further exploit of the market.