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Markets and macro insights with Bernard Swords, Chief Investment Officer
How did markets fare last week?
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Last week was tougher for equity markets; the world index was down by just over 1%, a decline of 0.9% for February. Tariff speculation continues to weigh on the markets, but the bigger change has been rising concern about the health of the US economy. The artificial intelligence (AI) theme is under pressure as Nvidia showed stronger earnings but a smaller upgrade to outlook than expected.
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As a result, there was a shift to the defensive sectors over the last week and for the month as a whole. On a positive note, fixed income markets are having a good month, with the euro area aggregate delivering 0.57%, which represents safety in an uncertain market.
Are these trends consistent with predictions?
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These trends are consistent with our outlook for the year. Goodbody had predicted that 2025 would be a year of single-digit returns from asset markets due to a high starting-point in equity markets on the one hand, and policy uncertainty with respect to the plans of the incoming US government on the other. We expected the global economy to continue to grow according to its established rate, and for the US to continue its strong performance.
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However, we also expected these growth rates to decline as the year progressed, reflecting greater downside risks than upside potential. None of the developments so far observable have contradicted such assessments. If we do see larger corrections in equity markets, we would be inclined to increase our exposure to the asset class.
How did the euro area perform?
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The euro area continued to outperform last week and for the month; the prospect of a halt to hostilities in Ukraine has been the latest boost for the zone. Such a possibility has helped the euro area to outperform the rest of the world by 10% this year, but some of this strong showing is also due to a recovery from a relatively oversold position at the end of 2024.
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We increased our euro area exposure in order to benefit from this upward trend. However, it would appear that the stronger performance of the euro zone has in large part now run its course.
Have there been changes in sector performance?
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As we mentioned above, this month is proving strong for the defensive sectors in equity markets due to worries about momentum in the US economy. We believe that this is oversold, and so would not predict that the trend will continue across the year. If we look at the year-to-date performance, all of the weakness in equity markets is concentrated in two sectors: Information Technology (IT) and Consumer Discretionary (due to the 30% fall in Tesla shares).
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Every other sector is up between 2% and 6% year-to-date. The AI theme is under a cloud, but from what companies connected to this field have been reporting over the last month, investment in the area will continue at a strong pace. What may be bothering investors is that the upgrades are smaller than seen in the past. The AI theme is still vibrant; it is simply maturing. IT is now the worst-performing sector this year; should such trend continue, we would think of increasing our exposure to the sector in order to benefit from a future upswing.
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One of the bright spots for equity markets so far this year is earnings. We are coming to the close of the fourth quarter reporting season, and after a slow start, earnings have ended strong. In the US, earnings in the quarter were up 13% year-on-year, 7% higher than forecast. Europe returned to profit growth, up 2% year-on-year, and three points higher than expected.
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If we look yet more closely, the news gets even better. Ex-Energy earnings are up 16% year-on-year in the US, and 11% in Europe. Adjustments to outlooks by companies are in line with the average for a reporting period. Of companies in the US that give guidance, 35% increased earnings estimates, while 18% predicted a cut. The strong dollar is weighing on the outlook but remains manageable.
The week ahead: what to watch out for
This week will be busy. Considerable focus will shift to data from the US to see if there is a broad weakening in the economy. We will get the US Payrolls report next week and the main business surveys (the Institute for Supply Management’s Manufacturing and non-Manufacturing indices). From the euro area, we will receive the latest inflation report (Consumer Price Index) and the report on Retail Sales. Coinciding with the release of this data, the European Central Bank (ECB) will have its regular policy-setting meeting (a 25bps cut is expected). From China, the Caxin Purchasing Managers’ Index will be released, as well as trade data. The National People’s Congress (the main policy-setting group of the country) meets next week.
