After a challenging first half of the year, the next six months will have two key factors driving investor sentiment. The first is how inflation behaves and whether we can confidently say in the coming months that it has peaked and is trending down. The second is Q2 and Q3 corporate earnings, along with the tone of management guidance, which will influence this period ahead.
Investors hoping for good news on the inflation front were disappointed on Wednesday when prices in the US were confirmed as rising at an annual rate of 9.1% in June. The figure was ahead of expectations of 8.8% and marks the highest level of inflation since 1981. Even the core inflation figure, which strips out some of the more volatile components like food and energy, was higher than expected at 5.9%. With inflation still rising, it will likely add further justification for the Federal Reserve (Fed) to continue to raise interest rates. They next meet on the 26/27th of July. Before the data was released, a 0.75% increase at that meeting already looked nailed on but now there is speculation that 1% could be on the table.
Earnings season in the States is just kicking off with the banks first to reveal their Q2 numbers. Investors will be keen to hear how businesses are being affected by changes in consumer demand and increases to many of their input costs. Pricing power and balance sheet strength look to be key in the coming period. Businesses with high profit margins face a decision of whether to absorb the cost increases or to raise their prices. For companies operating in the low margin but high-volume space, their options are more limited.
Firms that earn a lot of their revenues outside the US also face a headwind from a very strong dollar. This week saw the euro slide below parity with the dollar for the first time since 2002.
The week beginning 25th July sees a large number of the global mega-caps report – Amazon, Microsoft, Unilever, Apple, and Shell, to name a few. Given that these coincide with the Fed meeting, it is likely to be a busy week in the markets but should hopefully provide some clues as to what the second half of the year could bring.
For further advice on market trends, contact our investment management team on 01604 621 421.
John Naylor, Chartered FCSI – Head of Investment Committee