The latest US inflation number is higher than the market expected, but that should not detract from the positive outlook for US equities, according to Daniel Casali, chief investment strategist at Evelyn Partners.
Headline US inflation was 8.3 per cent in August, higher than the 8.1 per cent expected, but lower than the 8.5 per cent recorded in July.
Market participants may be more concerned that the core inflation number was 6.1 per cent, which is higher than the number recorded in July.
Core inflation is a measure which removes the most volatile items, such as energy and food costs. If this is rising, it may be a sign that higher inflation will be a longer-term phenomenon in the economy than has previously been anticipated.
Such a scenario might be regarded as negative for US equities, particularly if it leads to more aggressive interest rate rises from the US Federal Reserve.
But Casali was slightly more optimistic, saying, “Forward-looking equity markets will now also be looking at how the rising cost of living and interest rate rises impact economic growth and company earnings.
"After real GDP growth declined during the first two quarters of this year, the Atlanta Fed’s 'Nowcast model' expects real GDP to increase by 1.3 per cent (annualised) in the third quarter.
"By returning to growth, this indicates that the economy could be benefitting from decelerating inflation. Indeed, in the near term, the worst of the US EPS downgrade cycle seems to be in the rear mirror.
"In the latest week, 224 companies out of the S&P 500 have seen their 1-year forward Earnings Per Share (EPS) forecasts upgraded, against a low of 115 companies at the end of July, as downgrades are reduced.
"The consensus expects around 10 per cent EPS and 7 per cent for the S&P 500 in 2022 and 2023, respectively, supported by relatively solid top-line sales growth and high profit margins.
"For equities, provided CPI inflation decelerates to allow some leeway for the Fed to stop tightening sometime in 2023, healthy gains in company earnings are a favourable backdrop for equities to recover from oversold levels. Nevertheless, uncertainty caused by inflation remains a source of market risk over the coming quarters.”
david.thorpe@ft.com
