The US election – just political noise?

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The weakness in US equity markets in September appeared to come as a surprise to many investors, despite history pointing to this being seasonally quite typical. After such a strong and persistent rally since the Covid-19 lows of March, profit taking and market consolidation should be seen as a positive rather than a negative. However, what does make it different this time are three factors, increasing questions over market valuations, slowing economic momentum as further waves of Covid-19 restrictions take effect, and heightened uncertainties around the US election.

The narrowness of the US market rally has been well documented, but when analysed through the disciplined lens of cashflow, which is what ultimately drives value creation, the leading technology and communication services stocks of the S&P 500 have largely exceeded consensus earnings expectations, and actually been beneficiaries of the increased working from home and lockdown environments we have all become familiar with. What this means is that because of the earnings strength of these companies the relative valuation (P/E multiple) is not as extended as many would have us believe – see chart below.

Source: FactSet, MSCI World Index and AllianceBernstein (AB)

Source: FactSet, MSCI World Index and AllianceBernstein (AB)

View Full Article – published by Parmenion on 15th Octobber 2020