Confirmation or withdrawl

Once a year, as summer draws to a close, the who's who of the central banking community meet in the tranquil touristic town of Jackson Hole in the US state of Wyoming. Orchestrated by the Federal Reserve of Kansas, the now legendary Jackson Hole Economic Symposium can almost be compared to the status of a Formula-1 race in Monaco. This year, the meeting will be held August 25-27, with the theme “Reassessing the Constraints on Business and Politics.” Investors, stock market professionals and members of the media will look to Jackson Hole almost in awe. The focus will be on statements by Federal Reserve Chairman Jerome Powell. Although the Fed was quite wrong in the assessment that the rise in inflation was merely a temporary phenomenon, stated at last year's 2021 Symposium, Powell’s words will likely be weighed in the balance. This could well cause strong reactions on international capital markets and the event will be crucial for investor sentiment. The focus is less on whether the statements of the top central bankers turn out to be correct in the medium term, but rather on whether the assessment is in line with market expectations.?

Confirmation or withdrawl

The key question that needs to be answered is whether the Federal Reserve will confirm its communication from the end of July or whether Chairman Powell will be forced to retract. As a reminder, the Fed raised their key rate another 75 basis points to 2.5% at the end of July, but then followed it up with a relatively dovish communication. The Fed spoke about the fact that with 2.5% the “neutral rate” is reached and the next steps

should be designed depending on economic data. The interpretation of investors in the aftermath was that further interest rate increases are to be expected, but that they could be followed by interest rate cuts next year. In our view, the US central bank has little to no flexibility at this point to ease monetary policy next year. Fed Governor Powell seems to face, so to speak, a “communication showdown” at Jackson Hole.

Equity markets have risen sharply over the past two months, with US stock markets clearly outperforming during this period: The S&P 500 rose by around +17% and on the technology-driven Nasdaq, the indices posted a +22% gain. If the Fed con-firms its monetary policy communicated from the end of July, the way could be clear for the stock market rally to continue.

Normalization of earnings revisions?

In the current macroeconomic environment of high inflation and weakening economic growth, which is likely to be below potential this and next year, earnings estimates are on the brink of being revised upward. In recent weeks, we have seen an easing in this regard on a relative basis: there are equal numbers of positive and negative revisions (graph 1).

Nevertheless, we re-main of the opinion that there is further downward pressure on both margins and corporate earnings. Therefore, selection at the stock and industry level remains crucial.?

Continued volatile market environment

With continued limited visibility, capital markets, especially equities, are likely to remain volatile. This calls for active portfolio management. Against this background, we maintain our preference for US equities over European stocks and favor equities over bonds on a six to twelve month basis.