The major economies have successfully avoided a recession to date, with forward-looking indicators suggesting stable manufacturing and robust growth in services globally. Inflation is falling and should continue to decline this year. While Europe faces challenges due to the war in Ukraine and other differences, its economic cycle generally follows that of the US with a small delay. Despite declining headline inflation, the economy's resilience is expected to keep it above target levels well into next year. Anticipated rate cuts thus seem premature. The Federal Reserve is unlikely to cut rates until next year, while the European Central Bank may still raise rates a few more times. Financial conditions will likely remain tight, potentially adding pressure to the credit system and real economy.
Regarding politics, an agreement on the US debt ceiling is expected between Democrats and Republicans, reducing potential turmoil. Geopolitically, events like the war in Ukraine or elections in Turkey are unlikely to unsettle investors. Regarding the former, there is also an increasing international willingness to engage diplomatically among stakeholders and conflict participants.
In Q1 2023, the US economy showed resilience, enabling it to withstand the challenges posed by the rise in interest rates and avoid a recession. Corporate earnings have also exceeded expectations in ten of the eleven main sectors of the market. Although S&P 500 earnings per share (EPS) registered a year-on-year decline of about 3%, the profit level surpassed the consensus forecast by 6.5%.
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