In a new paper, Chris Galipeau, Senior Market Strategist and Lukasz Kalwak, Market Strategist at the Franklin Templeton Institute have examined how financial markets and the broader macroeconomic backdrop evolve when the Fed resumes cutting rates after a pause.

They noted, “Historically equities appear likely to grind higher amid rising volatility. Not all cuts are the same. Early cuts in a cycle historically have been bullish and come with relatively low volatility. Interest-rate cuts after a pause, by contrast, have been typically associated with higher short-term volatility, but they have nonetheless averaged strong one-year returns across equity styles. On average, the Russell 2000 Index small caps gained about 20% and the Nasdaq Composite technology stocks gained about 25% one year after such cuts

“Fixed income also benefits. Fixed income has historically participated in these rallies as well, with US Treasuries returning around 6% and corporate bonds around 8% in the year following a pause-cut

“GDP growth has typically continued, and although corporate earnings have made only minor progress, price multiples have expanded significantly. Post-pause cuts have often coincided with P/E multiples expanding by over 20% within the first year, underscoring the powerful role of monetary easing in driving equity prices higher despite economic challenges.”

“Probably the most surprising finding of our study is that interest-rate cuts following a pause have not historically provided a strong boost to corporate earnings. In the current environment, one could argue that the Fed is already late in making its next cut, with a softer labor market and the drag from tariffs already likely to weigh on corporate earnings. That said, it is worth remembering that US corporate earnings have risen for seven consecutive quarters at a pace of at least 8.5%,4 suggesting that the resilience of US firms may be underappreciated in this framework.

“Still, the historical record speaks for itself: Much like equities, earnings outcomes have been highly variable, ranging from robust +37% earnings-per-share (EPS) growth in 2003 to a sharp -24% contraction in 2008.”

The post How US equities and US fixed income performed with a resumption of Fed easing appeared first on AdviserVoice.

As a result, the US equity market has substantially outperformed Japan, Europe and emerging markets as a whole.

Chris Galipeau, Senior Market Strategist and Lukasz Kalwak, Senior Analyst at the Franklin Templeton Institute note (in the attached detailed paper) noted “The global earnings situation is changing. US earnings should still be strong, but we think emerging markets offer even better performance potential. Equities in Japan and Europe also look stronger to us than they have in the past 15 years.”

“Valuations matter along with earnings. While earnings drive stock prices over time, prices fluctuate as estimated earnings valuations oscillate for extended periods. In our view, long-term investors should consider various valuation methods as part of their toolkit.

“Another valuation method to consider is the price of stocks relative to earnings growth, which is known as the PEG ratio. We can use this measurement for both historical and forward-looking comparisons. We have compared the current price relative to the average earnings growth of the past 10 years, as well as the price relative to expected earnings for 2024, 2025 and 2026.2 In the historical comparison, while all markets appear to be undervalued relative to the past 10 years, the gap is the largest for emerging markets.

“Looking forward, emerging markets also appear to have the most attractive PEG ratios relative to expected earnings through 2026.

“When comparing equity opportunities, we believe investors may be well served to consider future earnings growth along with valuation measures. Based on our comparisons emerging markets, as represented by the MSCI Emerging Markets Index, show the strongest forward earnings growth combined with the lowest valuation backdrop.

“Regarding valuation, emerging markets appear undervalued, whether one considers the more traditional P/E multiple or if one also contemplates the forward price-to-earnings-growth measure (PEG ratio).”

The post Where in the world should investors look for earnings? appeared first on AdviserVoice.