US Consumer Confidence – still at elevated levels

This bout of volatility in equities looks likely to pass and fundamentals are strong

Is there really anything major to worry about?

Looking at the above chart of US consumer confidence we can see that levels above the 2007 period have been reached and we are fast approaching confidence levels not seen since the late 1990`s.

Looking at the earnings picture for this year both the US market (as measured by the S&P500) and Europe as measured by MSCI Europe ex UK are showing solid increases.

You will no doubt have noticed the green line on both charts turning down (this represents the index levels) and could be viewed as being positive as it means that the price earnings ratio (valuation) of both indices has become more reasonable.

Whilst there is no doubt that earnings from US companies will be significantly better than those from European companies this year due to the US tax cuts the forecasts for next year look surprisingly similar in terms of percentage growth.

This combined with a strengthening EUR could perhaps explain the recent underperformance of European equities in local currency terms. The good news is that expectations for the upcoming European earnings season is still somewhat modest and therefore there remains a good chance that many companies beat expectations.

Whilst there seems little doubt that US interest rates will increase further this year we expect the tightening to be gradual and longer term bond yields to remain well anchored at current levels given the modest inflation outlook.

Taking everything into account – modest interest rates, strong consumers, increasing GDP growth and strong corporate profit growth we expect the path of risk assets to be significantly higher once this bout of volatility eases. It will probably take a bit more time but we are in our opinion closer to the end of this period than the beginning.