What’s the single biggest risk to equity prices? We usually consider two big threats ever present on the horizon: on the one hand a global downturn resulting in depressed corporate earnings, which means stocks fall even if earnings multiples are static; on the other the risk that central banks will hike interest rates too quickly, forcing up short-end yields, resulting in a repricing of riskier assets.
The good thing is that usually these don’t come together. If there is a downturn central banks can cut – although their supplies of monetary policy ammunition have not yet been fully replenished. If central banks are forced to hike, it’s because growth is strong and the economy expanding with corporate earnings on the rise. The US right now would seem to be a case in point as the Fed hikes just as earnings in the last quarter jumped an incredible 20 per cent on average.