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Markets and macro insights with Bernard Swords, Chief Investment Officer
How did markets fare last week – and what were the key data releases?
- It was a volatile week for equity markets but recovery at the end of the week limited the losses. World equities ended down 0.6% in euro terms. The ‘new economy sectors’ were the weakest, with IT down 2% and Communication Services down 3%. Indeed, of the 11 sector groupings, nine were down last week.
- Company results have failed to excite, with upgrades not as large as expected, meanwhile, a drop in the probability of a ‘Republican sweep’ is weighing on equity markets.
- However, equities had risen a lot and had become very concentrated, so some unwind of these is not something to get overly concerned about.
- Earnings are beginning to grow again; outlook statements are encouraging; and economic data is not suggesting the possibility of a ‘growth scare’. Hence, we feel that we are going through a period of consolidation.
- On the data front, in the euro area, consumer confidence increased again in July, continuing the steady recovery that started last autumn. It still has further to go as it is not yet back to pre-Covid levels. That’s because there has not been follow into actual consumption in the region from this improved consumer confidence.
- Conversely, euro area business sentiment went the other way. The composition PMI dropped almost one point, and at 50.1, is just about in expansion territory.
- Both services and manufacturing sentiment deteriorated. At 45.6, the manufacturing PMI fell further into contraction territory, while at 51.9, the services PMI remained solidly in expansion territory. This is the second month in a row of weak business sentiment and the net effect does seem to be economists getting ready to cut their 2024 economic growth forecasts for the region, which is disappointing.
- The news from the US was more encouraging. The second quarter GDP showed the economy grew at an annualised rate of 2.8%, up from 1.4% in the first quarter. Inventory build was a help, adding 0.7% to the growth rate. However, consumer spending was up a healthy 2.3% against 1.5% in the first quarter. The report was stronger than expected and the momentum seemed to grow as the quarter went on which should allay fears of an imminent growth scare from the US. However, it could push out the expected timing of interest rate cuts.
The second quarter reporting season gathered pace last week. What are the key takeaways so far?
- So far, the Q2 earnings season is not as strong as the first quarter, however, it is still delivering a positive outcome.
- In the US, earnings are up 8% year-on-year, which is four points higher than estimated. Sales growth is 5% which is one point better than forecast. So, much of the earnings beat is coming from better margins.
- The euro area is relatively weaker. Earnings are down 3% year-on-year, which is two points better than forecast. However, the sales out-turn is worse than forecast – it is flat compared to expectations of 4% growth.
- In the US, the outlook statements are encouraging. Of the companies that issue guidance, 60% have increased it while only 10% have reduced it.
The week ahead: what to watch out for
We have a busy week ahead. In the euro area, we will have inflation data; can we break the recent bad run? We also get Q2 GDP for the region. In the US, nonfarm payrolls will be the main data release. Is the labour market remaining robust? The ISM Manufacturing survey and Consumer Confidence data will also be released, and the Federal Reserve will have its interest rate setting committee (FOMC) meeting, where no change is expected.
Please note that the next edition of Investment Viewpoint will be published on 2 September. In the meantime, if you’ve any queries, please contact your Goodbody representative.
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