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Energy and financials dominate

Commodity related shares still favoured but banks could have hidden risks.
Energy and financials dominate
  • S&P 500 bear market rallies could wrong-foot investors
  • UK market's 'old world' focus holding it in better stead 

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.

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