Tom Stevenson
“After months of policy turbulence and market swings, investors are pausing for breath. The August lull has come early, but shares are holding onto their rally since the April low.
The six-month scorecard
“Shares peaked in February before tumbling on the announcement of swingeing tariffs in April, which threaten to push the average import levy to its highest level in over a century. But markets have rebounded strongly: the S&P 500 is at a new all-time high around 6,300, and the FTSE 100 is flirting with a close above 9,000.
“Elsewhere, the US dollar is having its worst year since 1973 as concerns grow over the sustainability of the US budget deficit, economic policies, and pressure on the Federal Reserve’s independence. The so-called Big Beautiful Bill may deliver short-term growth, but long-term debt risks loom.
What’s driving shares higher?
“An unexpected feature of the current rally – now stronger even than the surges in 1998 and 2018, after similar market corrections – is the fact that once again earnings growth is being boosted by rising valuation multiples.
“A higher price-earnings ratio has pushed the US market 6% higher by itself, while earnings have added another 8% or so. Throw in a couple of percentage points of dividend income, and shares have enjoyed another mid-teens return year to date. That’s remarkable after the strong 20%+ rallies in 2023 and 2024.
“And it’s not just a US story. Wall Street is no longer the only game in town, with the falling dollar boosting emerging markets, and both Europe and the UK back in favour.
Earnings season
“It’s early days yet, but with around 60 of the biggest 500 US companies having declared results in the second quarter season, more than 80% of them are beating expectations. That’s not unusual – companies tend to massage forecasts lower in the run up to results season. But it does suggest that earnings growth will continue at around the long-run average of 7%.
“This week sees a wide range of companies reporting. Highlights will include Alphabet and Tesla. Tech stocks have been a key driver of the recent rally, with both Microsoft and Nvidia back into record share price territory and Alphabet and Apple well off their spring lows.
Also on the radar this week
“The Japanese market is closed today but it will be in focus this week following another bad loss for the previously dominant Liberal Democrats in the weekend’s Upper House elections. For the first time since its founding in 1955 the party has lost its majorities in both houses of parliament, amid a shift to the right that will look familiar in many other countries around the world.
“In Europe, the main event will be the latest rates announcement from the European Central Bank, although no change looks like the most likely outcome after a year of sharp cuts in the cost of borrowing. Unlike the Fed or the Bank of England, the ECB has halved interest rates to just 2% and it looks likely to pause for breath, with just one more cut pencilled in for later in the year.”