Tom Stevenson, Investment Director, Fidelity International comments on what’s driving investments this week.
There is no shortage of market-moving events and announcements to keep an eye on this week, with policy decisions and company earnings grabbing the headlines against a buoyant market backdrop. The market glass is decidedly half full, despite little tangible progress in talks to end the conflict in the Gulf.
Interest rates in the spotlight
“Central banks are in focus with rate-setting decisions from the Fed, Bank of England, Bank of Japan, and ECB.
“Investors expect the Fed to keep US interest rates unchanged when it meets on Wednesday. Powell is expected to highlight the resilience of the US economy as justification for staying on hold. The market’s view of the outlook for rates has bounced around since the start of the Middle East conflict and there is now a roughly 50% chance that rates will be on their way down again by the middle of next year.
“But where the Fed heads next is unclear thanks to the imminent arrival at the central bank of Kevin Warsh, Donald Trump’s nominee for the chairmanship, who is in the middle of a Congressional confirmation process. It’s expected that he will not make any policy changes until the autumn.
“Meanwhile, rate-setters will be active on this side of the Atlantic too. The ECB is almost certain to leave European interest rates unchanged for the seventh meeting in a row. Christine Lagarde has said that it is too early to assess the effect of surging energy prices on inflation and growth.
“Before Thursday’s decision there will be a flurry of relevant information including first estimates of inflation in April. Economists expect a rise to 2.9%, the highest level since 2023 and well above the ECB’s 2% target. Also on Thursday, there will be first quarter GDP data, which will shine a light on the extent to which Europe is starting to suffer from stagflation – the most difficult backdrop for central bankers to navigate.
“Here in the UK, odds are that rates will also be left unchanged but there is a small possibility of a rate hike from the current 3.75%, following a rise in the March inflation rate to 3.3% on the back of higher fuel prices. As in Europe the Bank of England is battling to navigate the twin pulls of rising prices but sluggish growth – wage growth dropped to 3.2% last week in line with levels that the Bank considers consistent with its 2% inflation target. Bank governor Andrew Bailey is also inclined not to rush to any judgements on the impact of the Middle East conflict.
“Finally, the Bank of Japan will decide on its interest rates. It is in a different position from the other major central banks because with negative real interest rates it has been keen to raise borrowing costs for some time. With so much uncertainty, that is unlikely to happen this week.
Earnings growth accelerates
“On the corporate front, first quarter earnings season gets fully into its stride this week, with a big focus on technology stocks. Most of the big players will be announcing figures this week, including Alphabet, Amazon, Apple, Meta, and Microsoft.
“The announcements from the Magnificent Seven will be of particular importance this quarter because of the way in which the April rally has been driven by the shares of this small handful of giant companies. They have contributed more than half the dollar value of the rise in the S&P 500.
“So far, the results round has continued the strong growth and beaten expectations that we have seen for many quarters in a row. With nearly 140 of the 500 biggest companies having reported so far, nearly 80% of them have beaten estimates by an average of over 10 percentage points.
“This suggests that the earnings boom continues to fire on all cylinders, and it suggests that expectations of low double-digit earnings growth for the quarter will be easily beaten. Profit growth could push as high as 20% for the quarter and indeed for the year as a whole.
“And it is not just a US story. If anything, earnings are growing even faster outside the US, with emerging markets companies in the vanguard.
“Earnings growth has helped to counter a decline in average valuation as the geopolitical backdrop has tempered sentiment. The 10% fall in share prices in March would have been a lot worse without earnings growth, because peak to trough valuations fell by around 20%.
“If valuations stabilise and earnings growth continues then, despite the rise through April, markets could go further still.
Broad rally
“With the capitalisation-weighted S&P 500 outpacing the equal weighted version of the index again, it is tempting to suggest that this is just a return of the Magnificent Seven story. But there’s more going on than this.
“The S&P 500 has had a fantastic run this month, up nearly 10% as investors looked through the energy supply shortages triggered by the conflict in the Middle East. But the Magnificent Seven are not the best performers.
“US stocks finished at an all-time high on Friday after blockbuster sales forecasts from Intel fuelled a rally in tech stocks. Nasdaq also closed at a record high. For the S&P, it was a fourth straight weekly advance, the longest winning streak for two years.
“The top 15 stocks in the S&P 500 all sell semiconductors or computer network equipment, so this is a different kind of tech rally. It’s about the companies providing the nuts and bolts of the data centres that will power the AI revolution, rather than the hyper-scalers that are building the AI models themselves.
“And non-AI focused stocks are also doing well, with strong performances in sectors from industrials to finance. This confirms how the US has been protected from the events in the Middle East by its exposure to tech but also by its energy independence. Small and mid-cap stocks have risen alongside the big companies.”
