Investment Viewpoint: Staying focused on the fundamentals

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Markets and macro insights with Bernard Swords, Chief Investment Officer

Key takeaways:

1. Equity markets edged higher while bond markets remained under pressure, driven by renewed tensions in the Middle East and rising energy prices.
2. Despite some company-specific disappointments, earnings season has started positively, with results generally exceeding expectations.
3. The European Central Bank (ECB) left interest rates unchanged, while updated US tariffs on imports from around 60 countries, including the EU, had little market impact.
4. Although geopolitical tensions and higher energy prices have created short-term uncertainty, stronger earnings and improving economic activity continue to support equity markets.
5. We remain focused on these fundamentals, which continue to provide a constructive backdrop for long-term investors.

Financial markets experienced a mixed week last week. Why was that?

• Equity markets recorded modest gains while fixed income markets remained under pressure last week. A key driver of market sentiment was the renewed escalation of tensions in the Middle East, which pushed energy prices higher.  Brent crude oil prices moved back towards the $100 per barrel level, although it has since fallen back below $90.
• The increase in energy prices has renewed concerns about inflation, particularly in Europe, and this has weighed on bond markets. The broad Euro Aggregate bond market declined by approximately 0.5% over the week as investors reassessed the outlook for interest rates and inflation.
• Equity markets proved more resilient, with global equities rising by 0.25% in euro terms. As might be expected in an environment of rising energy prices, commodity-related sectors performed best. Energy and materials stocks led the market higher, benefiting from expectations of stronger revenues and profitability if elevated commodity prices persist.
• The technology sector also staged a recovery after a challenging period in recent months. Semiconductor companies performed particularly well, rising by more than 2% over the course of the week and helping to lift the broader information technology sector. Investor sentiment towards artificial intelligence and digital infrastructure remains positive, despite ongoing debates around the level of spending required to support future growth.

What stood out from earnings season so far?

• Within the earnings season, there were some notable company-specific developments. Communication services was the weakest-performing sector following comments from Alphabet regarding increased capital expenditure plans. Some investors remain cautious about the substantial investments being made by large technology companies in artificial intelligence infrastructure. However, we continue to believe that many of these companies are making sensible long-term investments that should support future earnings growth and strengthen their competitive positions.
• Elsewhere, weaker-than-expected results from Nestlé weighed on the consumer staples sector, while Tesla’s earnings disappointed investors and contributed to weakness in consumer discretionary stocks.
• Despite these individual disappointments, the overall earnings season has started on a positive note. Only around a quarter of US companies have reported results so far, with an even smaller proportion of European companies having released their numbers.
• Importantly, profit forecasts had been revised higher ahead of the reporting season, and the results delivered to date have generally exceeded these increased expectations. This reinforces our view that the strength of corporate earnings remains one of the key supports for equity markets.

What were the key economic developments last week?

• In Europe, attention centred on the latest meeting of the European Central Bank (ECB). As expected, the ECB left interest rates unchanged. Policymakers emphasised that future decisions will remain data dependent, with particular attention being paid to developments in energy markets. Should energy prices remain at current levels, the risk of inflationary pressures increasing again could raise the likelihood of a further interest rate increase at a future meeting.
• Trade policy also returned to the spotlight during the week. The temporary 10% US global tariff arrangement expired and was replaced by a new tariff regime imposing duties of between 10% and 12% on imports from approximately 60 countries, including members of the European Union. Financial markets reacted relatively calmly to the announcement, as the changes had been widely anticipated. More broadly, the tariffs implemented to date have caused significantly less economic disruption than many investors initially feared.
• Economic data released during the week was relatively limited but generally encouraging. In the euro area, the closely watched Purchasing Managers’ Index (PMI) surveys surprised positively. The composite PMI rose to 51.9, comfortably above expectations and firmly within expansion territory. The improvement was driven largely by stronger activity in the services sector, while manufacturing continued to show resilience. Consumer confidence data also improved during the month, suggesting households are becoming increasingly optimistic about economic conditions.
• While the recent rise in energy prices may pose a challenge to sentiment in the months ahead, the latest survey data suggests that economic activity across the euro area continued to strengthen during the second quarter. This is a welcome development after a prolonged period of subdued growth.

What is the overall outlook?

• While geopolitical tensions and higher energy prices have created some short-term uncertainty, equity markets continue to be supported by a healthy corporate earnings environment and improving economic activity.
• We remain focused on these underlying fundamentals, which continue to provide a constructive backdrop for long-term investors.

The week ahead: what to watch out for

Looking ahead, this week will be considerably busier from an economic and policy perspective. The principal focus will be the meeting of the US Federal Reserve’s policy-setting committee, where investors will be looking for guidance on the outlook for interest rates. In addition, Gross Domestic Product (GDP) figures for both the US and the euro area will provide valuable insight into the health of consumers and the broader economy.

Finally, business sentiment surveys from China will offer an important indication of activity levels in the world’s second-largest economy.