Beyond the Headlines | 06 Oct 2023

Why we think equities are still expensive

Javier Corominas

Director of Global Macro Strategy

Our latest video for asset managers

In our latest Roundtable, “Finding opportunities in a global downturn”, Javier Corominas, Director of Global Macro Strategy, examines why we think equities are still expensive.

During the Virtual Roundtable, we covered the following topics:

Download the full recording

Hi, I’m Daniel Grosvenor, Director of Equity Strategy at Oxford Economics. In this month’s equity allocation report, we discuss the implications of an end to the Fed’s hiking cycle. A peak in policy rates is often a positive catalyst for equities, but we think there are three key reasons why it won’t be in this cycle. First, we don’t expect swift rate cuts.

In his recent Jackson Hole speech, Jerome Powell made clear that the FOMC will keep rates in restrictive territory until it’s confident that inflation is moving sustainably towards its target. We believe that the Fed will remain on hold until next May, and we only forecast 75 basis points of rate cuts over the course of next year. Second, equity valuations are already extremely stretched.

Unlike the majority of previous Fed tightening cycles, P/E multiples have actually expanded over the past 12 months in advance of the peak in rates, and they’re now well above long-term averages. We think that leaves very little room for a further rerating. We think equities are particularly expensive when to the yields that are now available on safer assets. Our cross asset relative valuation indicator is currently at a level that has historically been consistent with equities underperforming bonds over a six- to 12-month horizon.

Third, we forecast further downside for earnings as profit margins remain under pressure. Our top-down models suggest that US earnings will fall by 7% this year and will not begin a sustained recovery until Q2 2024. We think this will provide an ongoing headwind for equities over the next couple of quarters, offsetting the support from lower yields. So overall, we think that equities will struggle to rally further despite a Fed pause.

We are underweight the asset class in our Global Asset Allocation and we remain relatively defensively positioned at the sector level.

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Weak economic growth over the past decade didn’t slow a stellar market – especially equity returns. But current economic realities – from US monetary tightening to China’s broken growth model – are likely to complicate results in the medium-term future.

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Meet the team

Innes McFee
Innes McFee

Managing Director of Macro and Investor Services

+44 (0) 203 910 8028

Innes McFee

Innes McFee

Managing Director of Macro and Investor Services

London, United Kingdom

Innes McFee is the Managing Director of Macro and Investor Services, based in London. Innes oversees the activities of the Macro & Investor Services teams globally, including the Global Macro Forecast and Global Macro Service.

Innes joined Oxford Economics in 2017 after 6 years at Lloyds Banking Group as a Senior Economist. At Lloyds Innes was responsible for the economic scenarios underpinning the Group’s internal planning and stress testing; analysis of key risks; and developing Lloyds’ approach to multiple economic scenarios for IFRS9. In addition, Innes’ role included developing the Group’s capability in modelling macroeconomic fundamentals and UK banking markets and advising the Group Corporate Treasury on financial market developments.

Prior to joining Lloyds Innes was an Economic Advisor at HM Treasury where his roles included management of the UK’s foreign currency reserves; US economist; and G20 macroeconomic policy advisor. Innes has a first class undergraduate degree in Economics from the University of Durham and a MSc in Economics from Warwick University.

Javier Corominas

Director of Global Macro Strategy

+44 (0) 203 910 8115

Javier Corominas

Director of Global Macro Strategy

London, United Kingdom

Javier Corominas is Director of Global Macro Strategy at Oxford Economics. He is co-responsible for global strategic asset allocation as well the tactical calls across all asset classes. Additionally, he has a significant focus on providing thematic macro strategy research to generate actionable investment advice for asset allocators, portfolio managers and corporate Treasurers.

Javier is a senior macro and multi-asset investment strategist with over 16 years’ experience in active portfolio management as well as in independent macro research.

He has a background in macro-economic modelling and forecasting, portfolio optimization and risk budgeting, asset allocation (SAA and TAA), relative value models and global thematic investment research. This is coupled with a demonstrable track record in drawing conclusions for key asset markets, and developing profitable trade and investment strategies in FX, rates and the liquid asset classes.

Prior to re-joining Oxford Economics, he was a Director and Head of Research at Record Currency Management, one of the largest institutional currency managers in the world, with pension funds, insurance companies, family offices and private equity houses as clients globally.

Javier is regular commentator on currency, fixed income and broader global macro themes in the financial media/press and a regular speaker and presenter at global investment conferences and fora.

Javier holds both a First-Class Degree and an M. Phil in Economics from Cambridge University. He has a keen interest in world history and all manner of racquet sports, and is also fluent in Spanish and French.

Ben May

Director, Macro Forecasting & Analysis

+44 (0) 203 910 8015

Ben May

Director, Macro Forecasting & Analysis

London, United Kingdom

Ben May is a Director of Global Macroeconomic Research at Oxford Economics and is involved in the production and presentation of the company’s global macroeconomic views, with a leading role in our coverage of the advanced economies. Ben joined Oxford Economics in April 2014. He has over 15 years’ experience as a macro economist in the public and private sector and has over a decade’s expertise covering the Eurozone economy.

Before joining the Global Macro team, Ben worked on the Eurozone team at Oxford Economics. In addition to his working covering broad Eurozone issues he was also responsible for research on the ECB and Germany. Prior to joining Oxford Economics, Ben spent over six years at Capital Economics and was responsible for the coverage of the southern Eurozone economies throughout the Eurozone crisis. Before that, he spent seven years at the Bank of England, working in three divisions of the Monetary Analysis area of the Bank, which provides research and analysis for the Monetary Policy Committee. Ben has a BSc in Economics with Statistics from the University of Bristol and an MSc in Economics from University College London.

Sergi Lanau

Director of Global Emerging Markets Strategy

Sergi Lanau

Director of Global Emerging Markets Strategy

London, United Kingdom

Sergi’s research focuses on emerging and frontier markets. He joined Oxford Economics in 2023. He previously worked on emerging markets and the eurozone at the Institute of International Finance and IMF. He began his career at the Bank of England.

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