Tom Stevenson, Investment Director, Fidelity International comments on what’s driving investments this week.
Just when you think it is safe to go back in the water, the alarm is sounded again. Investors are trying hard to look through conflict in the Gulf to another buoyant earnings season. But no sooner have they dived back in than another red flag is raised and they are swimming back to the beach. Last week ended on a high that few investors could have expected. Six weeks after the start of hostilities in the Middle East, equity markets completed a dramatic round trip that saw a month-long 10% correction erased in just a couple of weeks as share prices returned to new highs.
The S&P 500 jumped on Friday by 1.2% to 7,126 as it looked likely that a re-opening of the Strait of Hormuz could pave the way to a more durable peace deal between the US and Iran. Oil fell, shares rose, the dollar weakened. All the usual risk-on signals. The S&P index’s previous peak was just under 7,000 in January.
Geopolitical uncertainty returns
Subsequent events over the weekend, however, are already suggesting that the V-shaped rally could have been a case of too much too quickly. Wishing for a return to the previous status quo is not the same thing as actually achieving it. Finding a solution for both parties will be a tough diplomatic test and another tense week beckons.
The good news about the market rally in April is that it has been pretty broad based. The number of stocks trading above their medium- and long-term moving averages is well above 50%. The equal weighted S&P 500 index is back close to its pre-war high.
Tech back in the driving seat
But the big driver of the capitalisation-weighted index has once again been tech, and the Magnificent Seven in particular. The AI transformation story is still the dominant market narrative and the Mag 7 has come full circle after a six month pause for breath. Nvidia closed above $200 on Friday, having been as low as $165 at the end of March.
Elsewhere, the tech story is driving non-US markets too. South Korea and Taiwan account for 75% of emerging market returns over the past year and most of those gains have come from just three stocks, all makers of semiconductors. Profits from Taiwan Semiconductor, SK Hynix and Samsung are on track to exceed those of Apple, Amazon and Alphabet combined. Samsung is expected to see its operating profits rise six-fold this year.
“Samsung’s shares have more than quadrupled over the past year. The Korean Kospi index it dominates has more than doubled over the same period.
Earnings season gathers pace
“The tech boom is driving very strong growth in corporate earnings, with a 13% forecast increase in profits in the first quarter of 2026 more than likely to be easily beaten if recent history is any guide. Estimates for future quarters are all coming in at the top end of the range too. The calendar year estimate for 2026 now stands at 18%.
“This coming week sees earnings season broadening out from the banks that kicked things off last week. The Wall Street giants generally delivered strong numbers on the back of good trading profits in volatile markets. This week, there are more financials in the spotlight such as American Express, but also a wide range of industrial, energy and consumer stocks like Lockheed Martin, Nestle and BP.
Earnings growth has done all the heavy lifting, offsetting a stiff decline in valuations. The average multiple of earnings demanded of investors in the US market fell by around 20% during the March downturn and it still stands 10% lower than at its peak. That kind of divergence is not unusual because investors always look through earnings booms to harder times ahead. But the difference is stark at the moment and that puts a lot of pressure on earnings to keep the show on the road. The results round over the next few weeks will be watched closely for signs that the energy shock in the Gulf might be starting to bleed into the rest of the world economy.
Market lessons from the past
Investors looking for guidance about which way the market goes from here can find supportive evidence whether they are hoping for the best or fearing the worst. Run back to 2018 and earnings were boosted by tax cuts in the first Trump presidency. There were a couple of big corrections during the year, but earnings growth carried the day and shares carried on rising until Covid struck in early 2020.
But pessimists can find other examples where the market’s concerns were prescient. The early 1970s oil shock and the bursting of the dot.com bubble in 2000 showed what happens when rising earnings are temporarily papering over deeper cracks in the market. Sentiment on Monday morning was altogether more nervous than at the start of the weekend. Oil prices rose by 5% to $95 a barrel as the week started, rebounding from Friday’s steep declines after the US seized an Iranian ship in the Gulf of Oman and Iran vowed quick retaliation.
European shares fell around 1% at the open after Iran said it had not yet decided whether to engage in a new round of peace talks due to start this week in Pakistan before a fragile two-week ceasefire is due to end tomorrow. But that followed an easier start to the week in Asia. Japan and China both ended 0.6% higher
Borrowing costs ticked higher, with the US 10-year bond yield up 3 basis points to 4.27%. Below the 4.48% peak last month but above the 3.96% level before the war began.
Inflation and interest rates in focus
Newsflow from the Gulf and the start in earnest of earnings season this week will grab the headlines, but a handful of other releases will garner some attention too. Here in the UK, Wednesday’s inflation data will be in focus, with rising petrol prices expected to push the year-on-year increase in inflation from 3 to 3.3%.
The war and its inflationary consequences have triggered volatility in interest rate expectations in recent weeks. The start of the conflict saw traders pricing in four quarter point rate hikes from the Bank of England but this fell back to just one hike as hopes for a ceasefire and lower energy prices eased inflation concerns. The next BoE meeting is scheduled for April 30.
In Europe a clutch of survey data releases this week will show how soaring energy prices are feeding into the region’s biggest economy, Germany. Christine Lagarde at the ECB said last week that it was too early to be drawing conclusions about interest rates in the eurozone. Weak sentiment data this week could make the case for keeping European interest rates low, even if inflation picks up a bit in the short term. Overall, the glass remains half full this week. But, having clawed back all of March’s losses, there’s less room for error. All eyes remain on the Gulf.
