Stock markets at record highs: time for investors to buy or employ caution?

Several Wall Street indexes are at record highs and the IBEX 35 is nearing levels not seen since before the 2008 financial crisis, reflecting the optimism of European and Asian stock markets. Do equities have potential for further increases or should investors wait for a change in cycle? Ismael García Puente, head of Investment and Fund Selection at MAPFRE Inversión, believes that the strong macroeconomic fundamentals and sustained business profits point to a positive trend, although he encourages some caution.

In the United States, growth forecasts had been dropping over the course of the year, although they are no longer quite as pessimistic; inflation of around 3% is not seen as particularly high and corporate earnings are proving unstoppable. Ismael García believes that these factors, along with a more neutral monetary policy, bolster investors' optimism on Wall Street.

The analyst explained that major investments in artificial intelligence are having a direct impact on large technology firms but also have ramifications on the industrial sector, real estate or the materials sectors, leading to profit growth prospects for the 493 companies on the S&P500 practically matching the Magnificent 7 for the next year.

In Spain, the IBEX 35 is at levels not seen over the past 18 years ago, and at MAPFRE Inversión they believe its historic ceiling could be broken if the risk appetite of investors is maintained. Several facts support this view: the outlook for the banking sector in Europe as a whole is particularly good, favoring the IBEX, and September, generally a bad month in the stock market, has seen increases all around.

Against this backdrop, Ismael García has recommended a prudent approach to avoid harming recent profitability, although he believes that equities will maintain their upward trend. In terms of fixed income, MAPFRE Inversión is exercising caution and shortening the average durations of debt.

The US will lower rates, but the debate continues

In statements made this Wednesday prior to the Fed meeting, Ismael García Puente recalled that the consensus foresees a 25 basis point cut; although, it will be "one of the most divided decisions of recent times," with some of its members opposed to cuts and others, the closest to Trump, pushing for a 50-bp cut.

Ismael García Puente anticipates an "accommodative" message from the Chair of the Federal Reserve, Jerome Powell, in line with a macroeconomic backdrop that is somewhat ambiguous: inflation, around 3%, is "uncomfortable" for the Fed but "not concerning," while employment data is a cause for concern, seemingly affected by trade disputes.

The Bank of England is also scheduled to meet this week, a meeting at which it is expected that interest rates will be maintained. Ismael García sees the British economy as "presenting the greatest uncertainty" amongst the major powers, with high inflation of 3.8%, which is higher than the figure seen in the US, a "complicated" fiscal situation, and the scrutiny of investors towards the government’s upcoming budgets.

On the foreign exchange market, the euro is at a four-year high against the dollar, which has been attributed to the loss of confidence in the US and the "unconventional" decisions of its president, Donald Trump; although this can mainly be attribute to expectations of interest rate cuts in the North American giant, according to Ismael García. Therefore, it is likely that the trend will continue, but not that there will be significant appreciations of the euro against the dollar as US rate cuts "are already priced in."