Investment Viewpoint: US earnings impress

Simplify the complex with clear and concise market insights direct from our investment experts every week.

Markets and macro insights with Sebastian Orsi CFA, Senior Research Analyst

What were the main developments in markets last week?

• In another strong week, global equity markets were up about 1.2% in euro terms. The Asia Pacific region (+1.6%) and the US (+1.5%) led the rise, while European equities showed only a slight upturn.
• Global equities were up 4% in September with euro-based investors getting a boost from a slightly weaker euro. Asia Pacific was the strongest region, (+5.2%), while the US also outperformed (+4.2%) and Europe lagged slightly (+2.6%).

Which market sectors performed particularly well?

• The Growth and Cyclical sectors continue to lead the markets, whereas Defensives declined. IT was the strongest sector (+4%), followed by Communication Services (+1%, despite the decline in Meta’s share price). Consumer Staples and Real Estate were the weakest sectors, both down over 2% over the week.
• The IT sector dominated market returns in September, up over 9%, while Utilities (+4.9%) and Health Care (+4.7%) also outperformed. Real Estate and Materials were the laggards.

What key factor influenced the strong market performance?

• The market reaction to the mega-cap earnings reports was generally very positive, and a significant driver of market returns.

How did bond markets perform?

• European bond markets were slightly up on the week, by 0.1%, with Government bonds slightly outperforming Corporate bonds. US bonds were down about 0.6% last week as yields ticked higher following hawkish commentary from US Federal Reserve Chair Powell.
• Euro bond markets were up 0.8% in September, with government bonds slightly edging corporates.

What were the wider political factors driving markets?

• US President Trump and Chinese President Xi met in South Korea last week. Export controls on rare earths and technology products were postponed for a year. The US agreed to reduce fentanyl-related tariffs by 10%, and shipping industry levies will be reduced. The moves are relatively small, but important because they suggest a further de-escalation of trade conflicts as well as possible good news arising from planned future negotiations.

What monetary policy decisions influenced markets last week?

• Central bank decisions on rates were in the news again last week. The US Federal Reserve made an expected 0.25% cut, while the European Central Bank made no change. Federal Reserve Chair Powell’s post-meeting comments (see below for more details) caused US bonds to tick higher.

What were the developments in the area of earnings?

• Last week was the busiest of the third quarter earnings season, and the results and outlook commentary have been positive in the aggregate, particularly in the US. By Friday of last week, about 60% of the S&P 500 companies and 50% of the STOXX Europe 600 had reported.
• The US has seen a strong result so far. Expectations were for ~7% year-over-year (y/y) growth ahead of earnings. Results to date are about 11% y/y growth, with the biggest surprises in Consumer Discretionary (Amazon), and Health Care. The strongest growth is in IT at 25% y/y, more than twice the market rate of growth.

What did earnings reports in Europe show?

• In Europe, expectations were more modest coming into the results, with -1% y/y EPS growth forecast. This has now edged up to ~2%, given that results to date have come in about 5% better than anticipated.

What can we conclude overall from last week’s earnings reports?

• One of the main takeaways from last week’s earnings, which included reports from five of the so-called ‘Magnificent 7’ companies, was that the AI data centre investment theme remains robust. Capital spending plans were increased in view of stronger than anticipated revenue growth, growing backlogs and capacity constraints.

What further indications came from the US Federal Reserve?

• As expected, the Federal Reserve cut the overnight deposit rate by 0.25% to 4% and confirmed that quantitative tightening will be discontinued. The surprise for the markets came from Chair Powell’s comment in the subsequent press conference that a further rate cut in December was “not a foregone conclusion…far from it”. While one member of the Fed Committee again dissented from the decision, seeking a 0.5% cut in rates, this meeting also saw a dissenter who preferred no change in policy.

What was the background to the decision taken by the European Central Bank?

• In leaving rates unchanged, the ECB Governing Council reiterated its expectation that inflation will be stable around its 2% target, and that it anticipates resilient economic growth, though the situation remains uncertain given fluctuating geopolitical and trade tensions. The ECB have in recent months managed market expectations in a manner that affords it maximum flexibility to react to future events as it sees fit.

What economic data was released last week?

• The main economic data released last week concerned euro area GDP, inflation and unemployment. Preliminary estimates of Euro area GDP growth came in at 0.20% quarter-over-quarter (q/q) or 1.3% y/y, both about 0.10% ahead of expectations. French growth (0.5% q/q compared to expectations for 0.2%) was the main driver of outperformance; German GDP growth was only 0.0% q/q but better than –0.2% last quarter.
• The initial euro area October CPI estimate of 2.1% was in line with expectations, although core CPI of 2.4% was 0.10% higher than expected and flat compared to last month. Euro area unemployment remains at 6.3%, stable compared to last month.

The week ahead: what to watch out for

Data releases this week will once again be relatively light given that the US government shutdown continues. Key releases will be the ISM figures, (Manufacturing on Monday, Services on Tuesday) and EU retail sales on Thursday. In the US, the ISM Manufacturing Index is expected to show a relatively slow but slight positive trend at 49.8 compared to 49.1 last month. The US ISM Services index is expected to tick up to 51.1 from 50.0 last month.