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This week a client question (of sorts). I have two friends – one a professional investor, the other, an active, well-informed non-professional – who raised cash (a while back) and have missed out on the last 10% or so of the rally from the April lows. They have what feels like a pretty respectable list of worries (tariffs, weakening labour markets, government deficits) and yet today’s equity market only seems to be interested in the good news. I can see in my head now their strained, tense smiles as equity markets rose again this week. Their question is how can equity markets be at (or near) all-time highs with everything that is going on?
This topic means I am now straying, unhappily, into the arena of short term equity market forecasts. When I am asked for them I always think of Willie Goldman, the screenwriter for (amongst other things) Butch Cassidy and the Sundance Kid, who once famously said of the movie industry:
“Nobody knows anything. Not one person in the entire motion picture field knows for a certainty what’s going to work. Every time out it’s a guess and, if you’re lucky, an educated one.”
This is equally true for short term equity market forecasts. The main reason for this is that what really moves equity markets are surprises. And, by definition, surprises can be tricky to predict. This week, for instance, one market surprise was the announcement of a US/Japan trade deal. Toyota rose 14% on the news and Honda 11% as there was a realisation that Japanese manufacturers (facing a flat 15% tariff) might actually be in a better place than US car makers (facing 50% tariffs on their steel and copper imports). Our Japanese ETF was up 5% in 2 days. My broader point here is that tariffs feel more like a two way risk here rather than the relentless bad news of early April. The market has digested a weighted average US tariff rate of around 16% or so. Trump tariff headlines aren’t moving markets much and, as we saw with Japan this week, more concrete announcements can turn out to be positive. The tariff risk hasn’t gone away but you need new bad news to push markets lower. There hasn’t been much of that recently.
The other positive theme I would highlight has been the continued strength of the US technology sector. This is, of course, a reflection of the much longer term theme of revenues and profits migrating from the physical world to the online one. As an example, this week Alphabet (the parent of Google) reported quarterly revenue of $96bn, up 14% year on year, and quarterly earnings of $28bn, up 19%. Try and think of a UK based business that can make a $28bn profit in 3 months! Investors have been looking for a slowdown in Google search revenue as people migrate to using AI for their online questions rather than Google. If there is a change in consumer behaviour going on here, I don’t see it in Google’s search revenues:
This earnings growth has helped drive US equity prices higher. Indeed, more recently, the US has (again) started to outperform Europe and the UK:
My final point is on the economy. There were plenty of (very justifiable) fears that the tariff shock would be enough to trigger a meaningful slowdown or recession in the global economy. So far, this hasn’t came to pass. My best window into the latest US economic data is the Atlanta Fed GDPNow model which is showing no signs of a slowdown. And in the UK, retail sales numbers came out this morning that showed 1.7% year on year growth. This is hardly spectacular but equally I don’t see much of a slowdown in the consumer here.
This is indicative of much of the most recent economic data: some good, some bad, but no real evidence of a meaningful slowdown. And, in the absence of a recession, equity markets are normally friendly to investors.
That said, we are, of course, about to enter the seasonally tricky period of August and September. I understand why traders might want to be cautious here, especially after the run we have had since April. But this still feels like a two way market to me. Markets are always painful when they fall. But wincing on the sidelines as they grind higher isn’t much fun either.
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.
