Key takeaways
- Financial conditions have reached their strongest reading across the Bloomberg index history presented in this week’s episode.
- Forward earnings expectations continue to rise, potentially offering fundamental support to equities despite valuation concerns.
- Gold, copper and mining equities are beginning to show improving relative momentum, while financials remain strong but may be losing some momentum.
Are equity markets really as stretched as headline valuations suggest? The answer may depend on what investors are measuring.
This week on Markets in Motion, StoneCastle Investment Management’s Bruce Campbell looks beyond valuation multiples to examine several underlying signals shaping the market, including financial conditions, corporate earnings, commodity supply and demand, and changing sector momentum.
One of the strongest signals comes from financial conditions. The Bloomberg Financial Conditions Index shown by Campbell has climbed to its highest point across data extending back to 1997. That contrasts sharply with the deterioration seen around previous periods of major market stress and currently provides a constructive backdrop for risk assets.
This article is being disseminated on behalf of StoneCastle Investment Management a third-party issuer and is intended for informational purposes only.
Corporate earnings could also challenge the argument that equities have simply become too expensive.
Campbell highlights the relationship between the market and forward earnings expectations, noting that equities have historically tended to follow the broader direction of earnings. Expectations continue to move higher, while the market has not fully matched that trajectory in the charts presented during the episode.
If earnings continue to expand, Campbell argues that equities could have room to advance despite concerns surrounding valuation.
Commodity signals strengthen
Away from the broader equity market, copper is sending an important supply-demand signal.
The metal has entered backwardation, with near-term copper valued above future prices. Campbell points to strong consumption and limited stockpiles as important factors behind the move.
Gold is also attracting attention. Central banks remain buyers, while gold ETFs are seeing investment flows globally. At the same time, historical seasonality is entering a period that has typically been more favourable for the precious metal.
Mining equities are beginning to reflect those conditions. Relative rotation graphs for gold and copper shares show several groups moving through the improving quadrant and toward leading territory, potentially setting up an important period for the sector heading into the fall.
Financial stocks remain another key area to monitor. Both Canadian and U.S. financials continue to demonstrate strong relative performance, although Campbell sees early signs that momentum could be starting to ease. With Canadian banks entering reporting season, upcoming results could provide another test for the sector.
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