Major American indices continue to record highs and the gains are piling up. The euphoria over the economic recovery and the good consumer data, added to the first quarter's business results, have fueled the exuberance in the financial markets. The 'Growth' stocks (mainly technological and small caps among them) in 2020 were joined by the 'Value' stocks in 2021, which have been lagging during last year.
This bullish rally is already causing concern among several investors. The CBOE Skew Index, which quantifies the cost of hedging in the face of a strong swing in stock prices, is hitting three-year highs. The fact is that inflation data (4.2% year-on-year in April) and the risk that the Fed will end its asset purchase program earlier than expected could precipitate an adjustment in the equity market.
Although we see a high probability of a market expectation readjustment in the near term, we believe that the outlook for equities remains positive.
There is still a long way to go to recover the economy, both in geographical areas that have lagged behind and in sectors more linked to the "contact economy". This, added to the ambitious North American and European recovery plan, means that good forecasts are maintained and that an eventual stock market crash in the short term represents an interesting entry opportunity.