Plus Ca Change... - Global market update

When you spend most of every working day sitting in front of a computer screen looking at the minute by minute machinations of financial markets as they go through the throes of ‘we love them, we hate them’, it is not unreasonable to expect that when you head off on holidays for two weeks, the distance will provide some longer-term perspective on what is going on in the world and what the future (more considered) outlook for markets will be. Well, you would think that anyway… But it is rarely the case – and certainly isn’t the case right now. As I switched back on the computer last Monday and perused all before me, what I found was that although prices had changed during my sojourn, the status quo was pretty much the same!!

Over in bond land, the yields, particularly for longer dated securities, have continued their march higher. Oil price fluctuations have been weighted towards the upside, continuing to put pressure on inflation expectations, and while it would be easy to conclude that was the only factor at work, a closer look at real yields shows they have also been moving higher. Whether that is due to growing concerns about budget deficits in the US or political unrest in Europe, they are approaching a point where some might ask whether, given how beaten down they are, they are worth a strategic investment, at least for people who don’t have to ‘mark to market’ their portfolio every day. 

One issue that certainly hasn’t changed is the voracious appetite in corporate land to raise debt, particularly to fund the ever-increasing demand for artificial intelligence (AI) capex – point of note here, no matter what Mr Trump says, I will not be calling it SI rather than AI!! Last week we saw SpaceX become the latest AI-adjacent firm to announce plans to issue a Treasury-auction-sized slate of debt to fund its AI ambitions. Most of it will come from bond issuance, so it is just another slug of securities that the investing public will need to absorb. Now using debt to fund investment is hardly anything new; indeed, the collapse of the 19th-century US railroad bubble was amplified by the poor credit quality of the debt that funded the boom. And the dot-com era was another notable investment boom funded by large swathes of debt issuance; however, it was notably different from today in one respect – the federal government effectively represented the inverse of that phenomenon, running budget surpluses, cutting back issuance and eventually buying back debt. 

And then we come to equity land. It may have been a few months, but last week we saw the S&P making a new all-time high – the last one was in August, for the record. The doomsayers will point out that while hosannas were sung about the market reaching this milestone, rather less attention was paid to the fact that only 39.4% of index members had enough giddyup to trade above their 100-day moving average. Since 1990, there have been only two days when the index was at a one-year high and the percentage of members above their 100-day was lower: December 22 of 1999 and March 22 of 2000 – make of that what you will.

With all the other ‘problems’ out there (and we haven’t even discussed the changes on the political landscape in the US with the fast-approaching midterm elections), it’s not hurting the equity markets – and the reason for this is that earnings have continued to grow at a genuinely impressive rate. This week sees earnings season on both sides of the Atlantic kicking off and, on the face of it, things look to be tickety-boo!

Analysts and companies have been more optimistic than normal in their earnings outlooks for the third quarter. As a result, estimated earnings for the S&P 500 for the third quarter are higher today compared to expectations at the start of the quarter. As of today, the S&P 500 is expected to report (year-over-year) earnings growth of 29.5% compared to the estimated (year-over-year) earnings growth rate of 26.7% on June 30. If this growth is achieved, it will mark the third consecutive quarter of earnings growth above 25% and the eighth consecutive quarter of double-digit earnings growth for the index. And everyone is getting in on the act as all eleven sectors are projected to report year-over-year growth. Five of these eleven sectors are predicted to report double-digit growth, led by the Energy, Information Technology, Communication Services and Materials sectors.

On this side of the pond, earnings season is approaching too, with around 50% of companies reporting by the end of October. Consensus expects growth of 22% year-on-year in Q3, following 28% growth in Q2, supported primarily by Energy and Financials. Excluding these sectors, earnings growth is still expected to be robust at 13%. At the top line, consensus expects sales growth of 8% in Q3, accelerating to 9% in Q4.

Perhaps the moment of truth is at hand for equity markets, and the bears believe the chickens are about to come home to roost. But if earnings manage to surprise to the upside in the coming weeks, maybe the chorus for markets will be “don’t worry, be happy”!