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David Gorman of Team Asset Management offers this week’s market review
The stock market accelerator pedal was gently pushed last week despite the persistent geopolitical and economic concerns that exist. Importantly, the near completion of the second-quarter US corporate results show that earnings expectations have been comfortably exceeded.
Those conservative analysts’ forecasts came as a result of cautious company guidance which has reinforced the positive result impression.
A 12% improvement in earnings year-on-year is highly satisfactory, and indeed, the forecasts for growth in the third and fourth quarter are currently at 7.2% and 7%, respectively. These numbers are also likely to be well below actual results.
It is clear that the markets have so far called it right by moving to record levels as earnings, revenues and cashflows have not yet been hurt by President Trump’s tariffs. Excitement about the potential for productivity improvements caused by artificial intelligence investment is still present.
The reinforcement, and indeed expansion, of huge capital expenditure programmes by companies such as Microsoft, Amazon and Alphabet has reinforced investor optimism over the attractions of mega capitalised shares. Over one half of the S&P500 index gains (+25%) since the April lows have come from the so-called “Magnificent Seven”.
However, investors continued to avoid pharmaceutical and biotech sectors due to uncertainties including the introduction of drug tariffs.
Apple had its best weekly share price performance for five years (up over 13%) as the company sidled up to the Trump administration, promising to spend $100bn on American products in the next four years.
Closer to home, the Bank of England cut interest rates by a quarter of a percentage point to 4%. The decision was a very close call, and it went to a second vote by members of the Monetary Policy Committee for the first time in its 28-year history. Governor Andrew Bailey reiterated that he expects interest rates to fall further but the “path had become more uncertain” due to the conflicting challenges of stubborn inflation and a slowing economy.
A plethora of poor economic readings in the US also reignited concerns about stagflation – an environment of slow growth and persistent inflation. Investors find it difficult to allocate assets during stagflation periods, although historically “real assets” can such as gold, silver and other precious metals or commodities can do well.
Politically, Donald Trump is set to meet Vladimir Putin in Alaska later this week to negotiate an end to the war in Ukraine. He is prepared to make concessions to the Kremlin, including the annexation of part of Ukrainian territory to Russia.
European and Ukrainian leaders are not happy. US Vice-President JD Vance summed up the situation clearly: “It will not make anyone really happy. Both Russians and Ukrainians will end up unhappy with the deal,” he lucidly conceded.
It is said that a good compromise must frustrate both sides. But in the world of boxing, we would talk about a points victory for Russia at the end of the fight.
Economically, this week will centre around US inflation figures for July, which are forecast to show “core” and “headline” rates of 3% and 2.8%, respectively. More elevated readings will dampen the chance of the expected US September interest rate cut.
Markets are fully aware of the resilience of the US economy through the strength of consumer spending, but pundits are arguing the slowdown in US job creation could impact the extent of how individuals spend. The July retail sales number released at the end of the week is expected to be 0.5% higher month on month.
Similar data is due in China where a slight moderation to 4.6% in spending is seen, compared with a June year-on-year figure of 4.8%. For years, the Chinese consumer has wanted to save rather than spend due to troubles in its property markets, but there seems to be a slow recovery now taking place, helped by government subsidies.
