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Profit expectations remain positive

Despite the turbulence in the capital markets during the early months of the year, profit expectations are relatively unaffected. This may explain why the stock markets have not noted major declines so far.

For the US stock market, the expected profit growth is around 8 percent for 2022 and 10 percent for 2023. The estimate for 2022 has actually been adjusted up slightly since the start of the year. If the energy sector, which was positively affected by price increases for fossil fuels and electricity, is excluded, the expected growth falls, but only marginally.

The pattern is largely the same for Europe, while profit expectations for the Stockholm stock exchange are still positive even though they have been lowered somewhat recently. The higher inflation rate and rising interest rates have thus far not had a negative effect on profit estimates, but it is difficult to believe that the rise in the price of intermediate goods would not be seen in profits.

The reported profit estimates for different stock exchange indices are a calculated aggregate of different analysts’ assessments. Other market participants may have a different opinion, which may have affected the stock market valuation. For example, investment bank Goldman Sachs recently lowered profit expectations for the US stock market for 2022 from 8 percent to 5 percent. In addition, the stock market valuation is also affected by the required rate of return or the profit multiple, which in turn is governed by, among other things, risk appetite, interest rates and inflation. Given the increased uncertainty and rising interest rates, the required rate of return should have been raised recently, which would have a negative effect on the stock market. Overall, the development so far during the year can be explained by a higher required rate of return and, to a lesser extent, by downgraded profit estimates. Increased concern about a recession, triggered by sharply rising policy rates to curb inflation, would lower profit expectations and lead to further stock market falls. At present, however, the market seems to see that risk as limited.

Uncertainty in the market remains high, despite a general recovery on several stock exchanges at the end of the month. The fund has not made any major changes between or within the asset classes during the month.

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