There’s plenty of market moving news on the horizon, but investors remain calm. The glass is half full. And that begs the question – are investors taking too much for granted?
Reasons to be cheerful…
There are plenty of positives. Earnings are growing and the results season which kicks off this week with reports from the big US banks looks likely to deliver growth of 7% or so as lowered expectations are, as usual, beaten.
Sentiment is only moderate. And there’s plenty of money, sitting on the sidelines in cash and money market funds. Meanwhile, bonds are playing ball too. Yields are steady in the 4-5% range. That’s not yet high enough to make shares look uncompetitive.
…but investors may be too relaxed
That’s the good news. The bad news is that investors may just be too complacent. Top of the list of worries is valuation. Goldman Sachs raised its forecasts for the S&P 500 last week on the grounds that shares are reasonably priced at 22 times expected earnings. Maybe it is right, but that is a high multiple by historic standards.
Another area of potential complacency is inflation. The market thinks the One Big Beautiful tax bill is a positive for growth, but it carries risks too. One of these is a pickup in inflation. There are signs of higher prices in commodity markets. Copper has soared on tariffs fears. So too has coffee.
Only oil is bucking the higher commodity trend, with the International Energy Agency warning that demand will be lower this year than at any time since 2009, other than during the pandemic.
Tariffs
Tariffs are potentially inflationary, too. But investors don’t seem to have noticed. Perhaps that’s because they just don’t believe the worst outcomes will actually be delivered. A new ‘deadline’ looms on 1 August but that seems to faze no-one. Maybe they are right that the President could back down in the face of a negative market response. But the reality is that tariffs will settle at a much higher level than they were at six months ago.
Gold and bitcoin – a different story
If you are looking for markets to price in investor concerns, then, you need to look beyond equities, bonds and most commodities. Gold and bitcoin are both at or close to all-time highs and that could be a red flag. It is telling us that investors are worried about the sustainability of global debts and, in particular, the US budget deficit.
The key question is whether all the fiscal expansion – first Covid, now the Big Beautiful tax and spending cuts – will deliver the growth it promises. If it does, and growth stays above the cost of funding the extra debt, then all can be well. If not, then an unsustainable debt spiral becomes a possibility.
With bitcoin above $120,000 and gold close to $3,500 an ounce, investors are seeking safe havens and voting with their feet on the dollar and other US assets.
This week
But that’s probably an issue for another day. In the short term, all eyes will be on earnings season in the US as the big banks kick results season off as usual this week. Citi, JP Morgan, Blackrock, Bank of America, Morgan Stanley, and Goldman Sachs will all have reported by Wednesday. And thereafter it will be four or five weeks of non-stop reporting. And with it, we’ll get our first sense of the impact of tariffs, or at least the impact of the fear of them on businesses and consumers.
Written by Tom Stevenson, Investment Director, Fidelity International
