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Chart of the month
Massive valuation contraction in 1H 2022
4 July 2022
Stock markets are down more than 20% and in bear territory. Higher inflation, interest rates and geopolitcal turmoil has caused the decline. So far the fundamentals remain strong with low unemployment and solid cash balances for consumers and corporates. Yet, central banks have started to take the punch bowl away from the party and a round of hangovers could be next if inflation do not cool off.
Valuation is not the best predictor for stock market direction, but there's a tendency towards certain intervals working as floor and ceiling on a given level of interest rates.
One of the the most popular industries in the last couple of years was semiconductors. Semiconductor earnings might well fall from the current levels as the shortage of chips becomes a oversupply into weak demand trends, but it will not change the longer term need for ever better semiconductors for digitalization of almost anything. Assuming a 10% activity decline in semi's and same earnings impact as in past downswings then semi's seems to be more three quarters thru a full cycle in stock market terms
Below is the chart of MSCI World semiconductor forward P/E ratio since 2012