Balance sheets and the economy
“Investors on a buying spree” – DAX still has room for improvement
February 25, 2024, 10:45 a.m
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The hunt for records on the stock markets is likely to continue. The company’s balance sheets have so far been extremely solid. Many corporations also spoil investors with buybacks. In addition, the topic of AI continues to cause gasps among investors. And when it comes to inflation, the new week could once again bring the topic of interest rate cuts into focus.
In the hunt for further records, DAX investors are setting their sights on the magical mark of 18,000 points. Analysts still see room for improvement for the German leading index after its recent jump to the record of 17,429 points. Signs of economic weakness could dampen the mood in the coming week, while the flood of company balance sheets should provide momentum.
With the upcoming dividend season, the extensive share buybacks and the predominantly good technical condition of the individual stocks, major setbacks should only occur with weak templates. Even at this elevated level, the German stock market is by no means expensive; in historical comparison, it still remains cheaply valued.
The bulls are currently firmly in control of the financial markets. The stock market hype surrounding the topic of artificial intelligence (AI) following the spectacular growth figures from the US chip company Nvidia had carried investors around the world. “Investors have gone into a real buying frenzy,” says Jürgen Molnar from broker RoboMarkets. On a weekly basis, the German stock market barometer rose 1.5 percent.
“The extent to which this high frenzy led by technology stocks carries global stocks forward will be influenced by monetary policy as well as by the fundamental environment,” summarize Helaba’s strategists. These two factors can always cause uncertainty among investors and therefore one or two setbacks. In Germany in particular, “the discrepancy between the stock market boom and the real economy is greatest,” says Helaba, with reference to the federal government’s growth forecast, which has been reduced to 0.2 percent.
Always the interest
In order to stimulate the economy in the eurozone, many investors are hoping for interest rate cuts from the European Central Bank (ECB) soon. Central bank representatives have repeatedly pointed out that the timing of the interest rate turnaround depends primarily on the coming inflation and economic data. Therefore, monetary policy expectations are likely to be tested again in the new week with fresh data. Analysts assume that inflation in the euro area, which was 2.8 percent in January, has continued to fall slightly. The data will be published on Friday.
“Inflation doesn’t have to be at two percent for interest rate cuts to go through, so we expect interest rate cuts this summer to boost corporate profits,” says investment expert Nathan Sweeney at asset manager Marlborough.
Incoming orders for durable goods (Tuesday), the second estimate of gross domestic product (Wednesday) and private household spending (Thursday) are likely to show the state of the US economy in the new week. “Even a mild recession has become unlikely in the USA,” said a Commerzbank comment. From their point of view, the easing of monetary policy should therefore be significantly less than previously expected. No longer are eight interest rate cuts expected, but rather five steps, three of them this year and two in 2025.
On Friday, the focus in the USA will be on the ISM manufacturing index. “This is still trending below the expansion threshold of 50. Any scratch at this threshold could cause current interest rate expectations to swing again,” says Helaba strategist Claudia Windt.
Companies have coped well with the crisis so far
On the corporate side, the accounting season continues – and so far it’s going better than expected: companies are proving to be crisis-resistant and are getting through the economic downturn comparatively well. Based on the earnings estimates for this year, the price-earnings ratio (P/E) is around 12. Measured against the average historical P/E ratio of around 15, the DAX has an upside potential of around 25 percent. However, this is offset by the high valuation of the US market. In the S&P 500 the P/E ratio is around 21, in the Nasdaq 100 it has now risen to an impressive 33. This means that the air on Wall Street is undoubtedly getting thinner.
Among the German companies, Munich Re, Covestro, MTU Aero, Puma, Beiersdorf and Daimler Truck Holding present figures.
A number of business figures are also expected from European companies, including Veolia, Bouygues, ASM International, London Stock Exchange and Erste Group. The doors of the Geneva Motor Show will also open on Monday.