Stock Market: The Bear Market Isn't Over...

How far could the CAC 40 fall in the event of a recession?

eric galiegue

eric galiegue

(Photo credits: Adobe Stock -)

(Photo credits: Adobe Stock -)

For several months, the risk of recession has disrupted the life of the markets and has catalyzed a bearish cycle for equities, which began on February 24, the day of the Russian invasion of Ukraine. Between the oil shock and the irruption of inflation, which directly takes purchasing power away from households, and the new restrictive monetary policy of the central banks, which constantly raise rates, the winds are, in effect, contrary. Prices have lost around 20% since the beginning of the year. But, how far could the price of the stock indices go in the event of an effective contraction of the national GDP? The experience of the last two recessions, 2002 and 2009, can help us find benchmarks. We present 4 stock index price comparison charts with 4 key variables.

1/ Eurostoxx and raw materials

Commodity prices and European shares.  (Source: Facttet and Valquant Expertise)

Commodity prices and European shares. (Source: Facttet and Valquant Expertise)

This graph shows that the price of raw materials, measured by the world index calculated by GSCI (Goldman Sachs Capital International), is far from having reached its recessive levels. Oil weighs heavily in this index, but in general it would take a very deep drop in commodity prices and the Eurostoxx to consider that they are entering the recession.

2/ CAC 40 and interest rates

France: Government bond rates and CAC 40 prices. (Source: Facstet and Valquant Expertyse)

France: Government bond rates and CAC 40 prices. (Source: Facstet and Valquant Expertyse)

This graph shows the scope of the fantastic rate hike since the beginning of 2022. Part of this rise, close to 300 basis points, corresponds to a catch-up, a return to normal after 7 years of exceptionally low rates, which can explained by the extremely accommodative monetary policy of the ECB between 2025 and 2022. The return of nominal rates above 2% corresponds to the year 2013. The CAC 40 at that time was worth much less than its current levels.

3/ CAC 40, turnover and net worth

CAC 40 for 25 years: prices, sales and net assets.  (source: Facttet and Valquant Expertise)

CAC 40 for 25 years: prices, sales and net assets. (source: Facttet and Valquant Expertise)

The long-term comparison of CAC 40 with turnover and net assets expressed in index points is particularly instructive. In the long term, until 2015, the stock market index usually fluctuated between the value of its accounting net worth and its turnover, except during the bubbles of 2000-2001 and 2007. Since 2015, the price of the CAC 40 is always higher than its volume of business: this reflects the very low level of interest rates and the practice of quantitative easing by the ECB, which clearly benefited the price of financial assets. The current tightening of monetary policies should push CAC 40 prices below their billing value (5,500 points).

4/ CAC 40 and expected profit expected by analysts

Prospective earnings and share price of CAC 40. (source: Facstet and Valquant Expertyse)

Prospective earnings and share price of CAC 40. (source: Facstet and Valquant Expertyse)

Current forecasts by financial analysts have pushed the forward looking CAC 40 earnings index to its all-time high. Analysts are waging a “phony war”, in the sense that, despite the deterioration of many parameters (increase in energy prices, reversal of leading indicators and some growth indicators, etc.), they have not lowered significantly fears to earnings forecasts. Particularly high earnings from the oil and gas industry partly explain the phenomenon, but it appears that the CAC 40 has already anticipated severe downward revisions to analyst earnings expectations. They should happen in the next few months.

All in all, the comparison of the CAC 40 and the Eurostoxx with the 4 key variables shows that the markets are not in recession. This contraction in activity, considered very likely by economists by 2023, should cause a further drop in stock market prices of between 10 and 20%.

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