Energy and financials dominate

Worries about inflation, interest rate hikes and the read-through to high valuations of some shares is what precipitated a very weak year so far for the US stock market. The danger now, with continued pressures on economic output, is that company earnings too could come up short. With inflation still an issue and rates set to rise, both the ‘P’ for price and the ‘E’ for earnings in PE ratios are under pressure. In other words, profits are falling at the same time investors are prepared to pay less of a multiple for them. Which means despite some recent rallying, it feels ever more likely that there is another powerful leg down to come in this bear market. 

In the UK, the FTSE 100 index has had a much better year, thanks to it being less representative of tech stocks that get priced for growth in perpetuity seemingly, and more focussed on traditional ‘old world’ companies. The UK’s windfall tax will hit the profits of oil & gas companies Shell (SHEL) and BP (BP), which is possibly a factor in them failing our next year EPS growth forecast tests, but they still rank highly on our earnings momentum screen. Miner Glencore (GLEN) is another commodity focussed business to do well against our screen tests.

The other sector that analysts appear positive  towards is financials. HSBC Holdings (HSBA), NatWest Group (NWG) and Standard Chartered (STAN) all rank highly on our UK large cap screen. The latter is top of the table, with no tests failed and, with its Asia focus, could benefit as that region finally begins to shake free of the clutches of the coronavirus pandemic.  

Caution is essential in these times, however. Rising interest rates are more conducive for banks making money from lending, but a severe recession would mean greater write-downs on bad loans. Furthermore, as central banks begin quantitative tightening and shrink their balance sheets,  reduced central bank reserves could cause issues for banks funding their core capital requirements.