A just-published report updated our multi-asset recommendations, noting that global stocks have rebounded moderately since their mid-June low from an extreme oversold level, on optimism that central banks will throttle back their rate hiking path. Still, they have recouped only a fraction of the first-half losses and there is scope for a further bounce in the near term.
Changes in valuations have been the main driver of equity prices this year. The global 12-month forward P/E ratio has plummeted from over 18 to a low of 14 before bouncing in the past month. Meanwhile, global 12-month forward earnings have been resilient to slowing global growth, although they show signs of plateauing.
The key to the equity market outlook is whether a full-blown recession develops, causing a meaningful downgrading of earnings expectations for both this year and next year, or if only a slowdown phase unfolds. We are still in the latter camp, and thus expect equity prices to be higher over the next 6-12 months. Stay tuned.