Despite stock market correction, no recession expected

This year, the stock market continued the growth trend that began in October 2022, when most participants in the capital market realized that the war in Ukraine and the potential energy crisis that resulted from it, leading to a sharp rise in inflation and the subsequent economic crisis, and the rise in key interest rates would not lead to a global recession.

I would just remind everyone that the expectation of a recession probability in 2022 is 80%, so global stocks have lost about 20% of their value since the beginning of 2022. The resilience of developed economies and the growth of corporate sales have restored confidence in stocks, and the global developed market index has risen 37.5% as of mid-July 2024 in euro terms.

As mentioned before, this is mainly due to significantly improved business performance, which has exceeded analyst expectations by an average of 8% for five consecutive quarters. This only confirms that the bearish trend in 2022 is overestimated and has a basis in reality.

Trends in artificial intelligence

The key moment in the growth of the stock price occurred in mid-2023, when the US semiconductor manufacturer Nvidia announced extremely expected sales growth at the expense of the development of artificial intelligence. In the following months, many other technology companies also experienced this trend.

Izidor Jerman, Triglav Skladi Photo: Triglav Skladi

As the value of stocks grows very fast, there is a “small” correction in October 2023, as most participants in the capital markets believe that growth is too fast and unsustainable in the long run. This is partly due to inflation expectations not falling fast enough, which means that central banks are expected to keep relatively high interest rates for a little longer.

Subsequently, the operating results announced at the beginning of this year were once again surprising, especially for technology companies directly related to the development of artificial intelligence, which significantly raised their already high sales and profit expectations for this year.

In the second quarter of this year, inflation expectations also began to decline after stagnating in the summer. This brought wind to the capital market participants, and expectations that interest rate cuts were about to begin were once again relevant. In fact, the European Central Bank was the first to announce a rate cut, and soon after, the Federal Reserve also began to more loudly consider lowering the key interest rate. On the basis of encouraging operating results and macroeconomic data, stock indices hit new all-time highs.

Is it time for a course correction?

Slowly, the assessment begins to re-emerge that stocks are too highly valued and it is time to slowly adjust. These usually happen suddenly in the stock market, but the reasons are different each time. This year’s panic started on the last day of July and lasted for five days in total. In the meantime, we are able to interpret all possible scenarios, including the fact that a recession is about to come again.

Infographic: Work

But the reality is now completely different. Inflation expectations continue to fall, the Federal Reserve hints that a rate cut cycle is about to start, and corporate earnings continue to beat expectations. U.S. companies saw sales increase by 5% and profits increase by 9.2% this quarter.

There was no reason to panic anyway, but it happened anyway, and was likely triggered by algorithmic trading. It was a great buying opportunity for long-term investors, but for some people, it raised blood pressure and caused a few days of slightly worse sleep.