In this article, we discuss four factors that will be important in determining the future direction of equity markets.

  • Earnings growth and profit margins will dictate the direction of equity markets. Ultimately, earnings growth over time tends to be the strongest driver of share price gains and it’s important for investors to closely monitor those variables that correlate strongly with earnings growth.
  • If bank profitability falls, so does the availability of credit. Falls below long-term support levels would be a worrying signal for the direction of economic growth and equity markets more broadly since the financials sector remains the second largest equity sector globally.
  • It’s important to watch economic indicators that correlate closely with the S&P 500 index. We are paying particular attention to the Morgan Stanley Business Conditions index and The ISM New Orders index.
  • The future shape of the yield curve matters. The inversion of the US curve is a worrying sign, although there is significant debate regarding its relevancy.