Here's what could prick the equity market's complacency bubble
- Whether this comfort will last would depend on what happens to corporate earnings growth, especially in the backdrop of volatile oil prices, analysts say
The US Federal Reserve’s latest policy statement was more of the same. Even so, it was received positively by equity markets. The US Fed's assurance on rates and inflation is expected to add to the market's complacency. Following the FOMC meeting on Wednesday, the CBOE volatility index - also known as the fear gauge, declined to pre-covid levels of 19.23. This is the lowest level since 21 February, 2020.
However, some analysts caution that this complacency may be short-lived.
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“After the recent correction, Powell’s comments on inflation do calm nerves of the investors. So, yes, complacency may increase, but whether this comfort will last would depend on what happens to corporate earnings growth, especially in the backdrop of volatile oil prices. We have seen raw material price for many sectors rise and some of them have also raised prices to avoid margin compression. So, March quarter earnings will give us a fair idea of how inflation is panning out," said an analyst with a multi-national broking house requesting anonymity.
Strong margins growth aided by cost savings and benign input costs have been a key trend in recent quarterly earnings. With normalcy now resuming, a slew of variable costs are expected to come back. That, along with exhausting low-cost inventory points to margin compression.
Global commodity prices are on an upswing due to supply crunch and are expected to rise further. Companies in tyres, auto, cement among others, have passed on the pressure of increased costs to customers, the quantum of hike may not be enough. This means pressure on margins could upset the Street's high expectations on earnings.
Meanwhile, in a widely expected move, the Fed kept short-term borrowing rates near zero. However, it turned more optimistic on the US economy’s growth prospects. Chairman Jerome Powell reiterated that before considering any action on rates or bond purchases, it would see if inflation is consistently above its 2% target. The Fed is of the view that a spike in inflation would be short-lived and indicate that there will likely be no interest rate hikes through 2023.
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