The Markets: Volatility, Earnings, and European Equities

Episode Summary

Executive Summary: Goldman Sachs’ Sharon Bell argues equity volatility is subdued because attention has shifted from growth to inflation and rates, while mega-cap U.S. tech has cushioned markets. She sees Europe as structurally cheaper than the U.S. and still attractive, notes broadly solid first-quarter earnings on both sides of the Atlantic, and flags debt-ceiling risks plus key central bank meetings as the next major market catalysts.

Main Topics: Why equity volatility is so low (Priority: 5/5): Bell says volatility has been restrained because markets have focused on inflation and interest rates rather than recession risk, while growth remains okay for now. Concentration in mega-cap tech has also dampened index volatility. Divergence across asset classes (Priority: 5/5): The transcript contrasts an inverted Treasury curve, resilient broad U.S. equity indices, weakness in small caps and regional banks, and flows into money-market funds, showing mixed cross-market signals. Europe’s valuation discount to the U.S. (Priority: 5/5): Bell explains that European equities trade at a large discount on valuation measures relative to U.S. stocks, partly due to sector mix, but she argues the gap is still wider than normal on a like-for-like basis. European equities as a value opportunity (Priority: 4/5): Despite recession risks and the dollar’s safe-haven appeal, Bell believes Europe remains better value than U.S. equities and has already begun outperforming as the valuation gap narrows. Earnings season strength and what may come next (Priority: 5/5): Early earnings reports in both the U.S. and Europe have been better than feared, helped by strong labor markets, falling gas prices, and China’s reopening, though Bell worries Q2 and Q3 could soften. Big tech earnings and AI support (Priority: 4/5): U.S. and European mega-cap tech companies have reported solid results and benefit from resilient core businesses and investment in AI, helping support equity markets and suppress volatility. Policy risk: debt ceiling and central banks (Priority: 5/5): Bell says the U.S. debt-ceiling debate is a live investor concern, but expects eventual passage. Next week’s Fed and ECB meetings, plus the ECB loan officer survey, are key watch items amid sticky inflation and slowing growth.

Key Arguments: Low volatility reflects a market focus on inflation and rates rather than imminent recession; recession risk is usually what drives sharp spikes in equity volatility. The U.S. stock market’s concentration in large-cap tech has cushioned broader volatility, even as small caps and regional banks have been weak. The yield curve inversion signals recession risk, but equities have not broadly sold off because index gains are concentrated in a narrow group of large-cap growth companies. European equities are materially cheaper than U.S. equities, and the discount is larger than would be expected from sector mix alone. Europe still looks like better value versus the U.S. if a severe downturn does not materialize, though a recession would likely push investors toward the dollar and U.S. assets. Q1 earnings were better than feared due to favorable macro conditions: China reopening, lower European gas prices, and strong U.S. employment. Big tech earnings have helped support the U.S. market, with underlying business resilience and AI investment providing additional strength. The debt-ceiling standoff is a meaningful market risk, with historical precedent suggesting sharp short-term declines if negotiations break down. The main near-term market test will be central bank communication, especially the Fed and ECB stance on further rate hikes and the path of inflation. The ECB loan officer survey matters more than usual because bank lending behavior can reveal stress after recent U.S. bank turmoil and the Credit Suisse takeover.

Data Points: U.S. equity volatility: lowest level since end of 2021 - VIX referenced as evidence of subdued equity volatility S&P 500 year-to-date return: up around 5% to 6% - Bell cites broad U.S. equity resilience despite banking stress Nasdaq year-to-date return: double-digit gain - Large-cap tech strength is supporting the index Russell 2000 year-to-date return: down year to date - Small-cap weakness contrasts with large-cap performance Dow year-to-date return: flat year to date - Old-economy/cyclical exposure has lagged U.S. P/E ratio: about 18 to 19 times - Used to compare valuations with Europe Europe P/E ratio: about 12 to 13 times - Shows Europe’s cheaper valuation versus the U.S. Europe discount to U.S.: about 30% on most metrics - Includes P/E, price-to-book, cash flow yields, and similar measures Historical like-for-like Europe discount: typically about 10% - Bell says the current sector-adjusted discount is larger than normal Current like-for-like Europe discount: about 20% - Discount remains elevated even after accounting for sector mix Europe earnings reports covered so far: about 20% to 30% of market cap - Early read on European earnings season U.S. jobs created in Q1: 1 million new jobs - Strong labor market supported first-quarter earnings Debt ceiling market precedent: S&P 500 fell 17% in 2011 - Illustrates downside risk if negotiations fail Russell 2000 in 2011 debt-ceiling episode: fell more than 20% - Small caps entered bear market territory in that episode

Pivotal Quotes: "Generally, to get a sharp spike in equity volatility, you need to be looking at a recession quite near term." — Sharon Bell: Explaining why volatility is currently subdued despite economic slowing "Europe trades at about a 30% discount to the US based on most metrics." — Sharon Bell: Summarizing the valuation gap between European and U.S. equities "If we see a recession in the US or elsewhere, then investors tend to go to the safety of the dollar." — Sharon Bell: Describing the main risk to the bullish case for European stocks

Implications: Listeners should watch for a shift from calm markets to more volatile conditions if growth weakens further. Europe may remain the cheaper equity market, but Fed/ECB guidance, bank lending data, and the debt-ceiling outcome could quickly change risk appetite.