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Surging volatility flags market fragility, but winter has yet to come

Margaret Yang
Margaret Yang10/22/2018 07:30 AM GMT+08  • 5 min read
Surging volatility flags market fragility, but winter has yet to come
SINGAPORE (Oct 22): The market turmoil earlier this month wiped out trillions of dollars of value from stocks, flagging the fragility of global markets as the impact of rising rates, trade frictions and protectionism brings earnings quality under closer
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SINGAPORE (Oct 22): The market turmoil earlier this month wiped out trillions of dollars of value from stocks, flagging the fragility of global markets as the impact of rising rates, trade frictions and protectionism brings earnings quality under closer scrutiny. US technology giants are facing a reality check on whether their double-digit top-line growth is sustainable in the quarters to come. Therefore, there is increasing pressure to bring the valuation back down to earth.

Firms in the Standard & Poor’s 500 Information Technology Index will probably say profits climbed 19% in 3Q — the first time since 2014 that they rose less than the broader market — before the rate of growth eases to half of that in two years. The technology sector’s rally seemed to have run out of steam in the short term as a result of high expectations of leadership stocks and a legitimate softening in top-line growth.

Over the last five months, US equities have outperformed the rest of the world, backed by share buybacks, earnings optimism and strong fundamental elements. The market has, however, yet to price in negative factors that have hurt the emerging markets during the same period, including rising borrowing costs, deteriorating trade relationship between the US and China, and higher oil prices that are sending inflation numbers higher, paving the way for more monetary tightening measures. These factors have rendered US equities vulnerable to potential corrections if any of its pillars soften. Before that happens, the unstoppable “Trump Rally” is likely to be supported by strong fundamental metrics, continuous share buybacks and capital inflow, which underpinned the negative impact of rate hikes and tightening monetary policy.

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