Opinion – From Grain to Grain: Beware of optimism in the recent rise in US equities


After reaching the year’s low in the middle of last month, the main US stock index, the S&P500, reversed its decline and is up 12.55%. The appreciation brings hope to many who invested last year. However, this appreciation may have its days numbered.

At the end of 2021, with the Brazilian stock market losing more than 10%, Brazilians’ interest turned abroad. At that time, the volume of Brazilian investors investing in BDRs broke records. BDRs are receipts for US shares traded on B3.

The optimism was justified by the past. The US stock market has appreciated for three consecutive years. The accumulated return in the three years reached 65.7%, equivalent to an average return of more than 18% per year.

At the end of the year, expectations were that the trend of earnings growth and low interest rates would continue. At that moment, I already warned that this expectation would be frustrated.

The political noise in Brazil, combined with the recent rise in the US market, seems to make many people forget the fundamentals and perhaps repeat the mistake of last year, turning their attention abroad.

Therefore, I now redouble the warning.

Corporate profits should start to fall from the fourth quarter of 2022 and interest rates should remain high throughout 2023.

Who also warns about the drop in profits is the prestigious American economic newspaper, The Wall Street Journal. Today’s report on the newspaper’s portal highlights that analysts expect profits to fall 2.1% in the fourth quarter compared to the same period last year.

The fall follows the low growth of profits, of just 2%, observed in the third quarter, according to a survey by the same newspaper.

As expected by analysts and managers, this should be just the beginning of the fall in profits and it should accelerate next year with the economic slowdown caused by high interest rates.

As the chairman of the Federal Reserve (FED), Jerome Powell, announced earlier this month, interest rates should continue to rise and stay high as long as inflation does not subside.

This combination of factors, high interest rates and falling profits, should make the recent rise in the US stock market short-lived.

Michael Viriato is an investment advisor and founding partner of Investor House

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