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To quote one colleague of mine, right now it’s the summer, the water’s warm, people are swimming. But we are getting close enough to autumn (typically a choppier part of the year) that it is worth thinking about the risks out there. Short term, the two that I think would move markets today are any signs of a slowdown in either (i) the economy or (ii) US technology earnings. Absent these, the direction of travel feels higher to me. Note, I do not have (very expensive looking) US valuations on my list. Your valuation starting point, of course, matters plenty longer term but, in the shorter term (and here I mean 1 year or less) there is little to no correlation between valuation and market returns. Sitting on the sidelines because of expensive US valuations has been a money losing strategy most of the last 15 years and (without wishing to anger the gods of finance) I am not sure why it would start working now.
On the economy, August’s higher tariff resets for countries like India will not help. There is also an important US non-farm payrolls report which comes out later today. But, apart from that, the latest economic data looks pretty steady to me. As an example, here is the New York Fed Nowcast forecast for GDP (built around the latest data releases) for this quarter:
This is running a little under 2.5% which is very much in line with longer term US growth rates. If the global economy is steady and growing, then this is normally a decent platform for equities to generate positive returns. And, if you look beyond all the Trump related drama and headlines, I feel like this would be a decent one line summary of the year so far.
The second risk is (was?) US technology earnings disappointing. I mentioned Google’s strong earnings report in last week’s note. This week Microsoft, Apple, Amazon and Meta (which by themselves make up 20% of the US S&P 500) reported their results. As a basket they remain strong. Microsoft, which has revenues of $76bn was able to grow them at a year on year rate of 18% which I find astonishing for a company of its size and market penetration. This has meant a solid start to the quarter for US markets with the US technology giants (as measured by the Magnificent 7 index) gaining 5.8%.
Unsurprisingly, money is starting to flow back into US markets from overseas to chase some of this return. July was the strongest month of the year so far for the US dollar, with the DXY index rising 3.2%. I have written plenty of times here that I do not want to be underweight US technology giants (which felt like quite a contrarian view for the first few months of 2025 but feels less so now). For July at least that was the right position to have. The risk, of course, remains that these companies’ gargantuan investment into AI (as illustrated below) ends up having low returns on investment. But, for now, there is clearly an AI revolution going on and the US (and Chinese) technology giants remain the best public market plays on them. We are not thinking of cutting our exposure here.
Longer term, of course, there are plenty of more structural risks to think about. The internet and smart phone revolutions decimated sectors like media, journalism and physical retail. I feel like, inevitably, AI will have a similar effect on plenty of today’s businesses. But which ones and how fast this impact comes is not at all clear today. Secondly, low growth countries with high debt levels (like, I am afraid to say, the UK) feel at risk. This is one that has threatened to bubble over at times this year but for now volatility on government debt remains low relative to recent history and is falling. Long may it stay that way.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
