Tapering, profit and equity prices
- 03 November 2021 (7 min read)
Key points
- As the US Federal Reserve’s tapering announcement is likely imminent, we offer an econometric quantification of the effect of the Fed’s quantitative easing (QE) programme on US equity prices, also taking into account interest rates, earnings and market stress
- Over the last two years, QE appears to explain nearly all the gains in equity prices in the S&P 500 index. However, we find that the information technology (IT) sector has been much more sensitive to QE than the rest of the index
- This does not necessarily mean that a correction is unavoidable when tapering starts. In our model, it is only when the Fed actively reduces its balance sheet by selling the securities it has acquired during QE that equity prices would be squeezed. We use our model to simulate what pace of Fed asset offloading would be consistent with stable equity prices
- Our model suggests that actual corporate earnings have no bearing on the equity valuation of IT stocks – contrary to what we find for the rest of the index. Only expected earnings seem to matter, and they have little connection with actual ones.
Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.