Equity Recovery: More to Go or Soft Patch Ahead?

• STOXX 600 little changed
• BOJ keeps rates on hold, split vote
• Oil prices rise again
• Wall Street futures lower

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EQUITY RECOVERY: MORE TO GO OR SOFT PATCH AHEAD?

MSCI's global index .MIWO00000PUS is trading above pre-war levels, which might seem counter-intuitive considering oil prices are more than 50% higher than where they were trading prior to the conflict.

"There are a couple of things going on," writes Thomas Mathews, head of markets, Asia Pacific at Capital Economics.

"For a start, the recovery in equities has been a lot more partial than the aggregate figures suggest."

The recovery has mainly been driven by a rebound in tech, with investors sensing an opportunity to buy AI stocks at lower prices.

Other sectors, Mathews notes, have not performed as strongly, and indexes with an absence of tech-related companies are still below pre-war levels. The most notable region for this is Europe, with the STOXX 600 .STOXX still 4% below its February 27 close.

"One implication is that there probably is still a residual risk premium in equity markets, even if it’s been somewhat masked by the good times in tech," Mathews notes.

"That suggests that there may still be room for a further recovery rally should the U.S.-Iran negotiations eventually prove more fruitful, even though equities are, in aggregate, already above pre-war levels."

On the other side of the coin, Mathews says that investors are still not factoring in any significant impact to corporate profits from the war, with very strong growth implied by earnings estimates this year.

"Should evidence accumulate of the conflict causing some trouble for earnings, equities could in principle
fall a lot further than they had even at their weakest point last month," Mathews says.

In their adverse scenario, which assumes a more protracted conflict and persistently high energy prices, CapEco believes the S&P 500 could fall as low as 6,000, implying a 16% decline from current levels.