The correction in US equities has accelerated this week. Central banks threatening higher interest rates are only one half of the story. China’s energy crunch is a window into how climate change could wreak havoc with equity valuations.
Of course, green investment will spur other opportunities. As one of Asia’s biggest emitters of carbon dioxide (per capita), Singapore is now entering into a $22bn infrastructure project, to import electricity from Australian solar farms through undersea cables.
That aside, the immediate focus of investors is perhaps how high growth stocks (IT, communication services) will weather a tighter Fed. Not that well, is the short answer.
All but three of the 78 companies in the S&P 500 IT index have seen their share prices fall this week.
But there are a lot of ‘ifs’: the recovery in profit margins has been impressive and offers a cushion against ‘stagflation’.
Yesterday’s revised GDP data pushed the y/y for profit margins up from 41.7% to 44.9%. Unit labour costs have fallen even further over the past year (revised from -2.40% y/y to -2.97% y/y). The inflation data will be crucial, to judge how far firms have been able to absorb higher costs.
