Viewpoints with Burkhard Varnholt - A global markets podcast (Ep. 74)

Burkhard Varnholt · UBS

The bull market, four years old, still has legs; investors should stay fully invested despite worries.

The bull market began on October 13, 2022, when the S&P 500 bottomed near 3,500, and has since more than doubled. The speaker still believes it has further to run. He argues investors should stay fully invested because bull markets must climb a wall of worry, and global stocks are being lifted by record corporate profits. He implies a horizon of about a year, saying the next bull-market birthday should come in October 2027.

“And, you know, as I've said before, I still believe it has legs to run for longer.”at 1:57

Burkhard Varnholt · UBS

Governments missed the cheap refinancing window and are now boxed in, facing tax hikes, austerity or fiscal repression.

Large economies overspent fiscally in recent years and almost all failed to lock in cheap long-term funding during the pandemic, when US 10-year yields traded near 38 basis points and European yields were mostly negative. Governments are now squeezed between inflation, rising debt-service costs, fiscal gridlock and competing bond issuance from global capex. The speaker expects policy responses ranging from tax increases and austerity to yield curve control and other forms of fiscal repression, since raising taxes rarely wins re-election and cutting spending is very hard. He concludes that bears draw the wrong conclusion from this and that a globally diversified portfolio, not cash, is the best hedge.

“large economies around the world have been fiscally overspending in the last couple of years... they really almost all entirely missed that golden opportunity... So now they're boxed in.”at 2:33

Burkhard Varnholt · UBS

US corporate profits are at record highs and should keep rising, supporting stocks and the economy.

US corporate America is highly profitable, with record profit margins in almost all segments of the economy. Pretax profit reached a record $4 trillion and after-tax profit a record $3.9 trillion through Q2, about a third of the global profit pool this year. Profits earned abroad by US companies also hit a record $1.2 trillion, which the speaker says shows the global economy is still doing well. Dividends have lagged profit growth, so undistributed profit reached a record $1.7 trillion, on top of record capex of $4.7 trillion this year. Profit growth outpacing employment growth also shows rising productivity. The speaker cites the IMF's forecast of 3.4% global growth next year, up from 3.1% this year, as further support. He argues profits are the lifeblood of the economy, funding taxes, jobs and investment, and he expects profits to keep rising through 2027.

“corporate America is incredibly profitable with a record high profit margin in almost all segments of the economy.”at 5:24

Burkhard Varnholt · UBS

Productivity gains offset aging-driven labor shortages, so the current inflation rise and bond yields should reverse in 2027.

A productivity boom is offsetting labor shortages caused by population aging in the US, Asia and Europe. Because profit growth outpaces employment growth, there is no wage-price spiral that would sustain inflation. The speaker says this explains why the current rise in inflation and bond yields should reverse, at least in 2027, while corporate profits continue to rise.

“this productivity boom... offsets labor shortages, which are caused by population aging... explains why there is no wage price spiral that causes perpetuating of inflation... we expect this current increase in inflation and bond yields to reverse at least in 2027”at 7:04