In the investment markets, summer has transitioned into autumn in a calm and positive sentiment – only the weakening of the dollar during the early part of the year casts a shadow over dollar-denominated returns.
The investment markets have been quite calm during the summer. It was an eventful period in both trade and geopolitics, but market reactions remained moderate.
The US stock market, which performed rather poorly compared to its European counterpart in the first half of the year, once again picked up, driven especially by technology companies. In the meantime, long-term interest rates have edged slightly upwards in the fixed income markets. In corporate bonds, credit spreads narrowed again after the turmoil in April and are currently at their lowest levels of the year. This has, in turn, positively reflected on the returns of fixed income investments.
Although the US stock market has performed well over the past year, the sustained depreciation of the dollar throughout the year has significantly reduced the returns on dollar-denominated investments. The dollar depreciated most rapidly in March–April. During the summer, the currency rose slightly, but in August, the weakened dollar has once again eroded returns.
Several factors are behind the positive market sentiment. The first of these is moderated inflation. In the euro area, inflation is currently even slightly below the central bank’s two percent target. The declining inflation allowed the European Central Bank (ECB) to lower interest rates as early as the beginning of the year, and the markets do not expect any further rate cuts from the central bank for the rest of the year.
In the USA, on the other hand, inflation figures have been on a slight upward trajectory. In addition, inflation expectations have increased due to tariffs, but the actual figures have remained moderate. No rate cuts have been seen so far this year in the USA, but currently the markets are expecting one or two rate cuts from the Fed during the autumn.
Another key factor behind the positive market sentiment is the trade agreements concluded during the summer, which effectively averted the worst-case tariff scenario feared in the spring. Earlier, there were fears that tariffs could rise to an average of up to 25 percent, but currently they are estimated to settle at an average of around 15 percent. This is significantly more than in recent years, but less than what US President Donald Trump envisioned in April. The details of the trade agreements are still open, however.
The favourable earnings growth has also contributed to the positive market sentiment. Previously, the concern was that earnings growth would weaken due to the uncertainty caused by tightening trade policies, but this has not happened. At the same time, earnings forecasts have been revised upwards, which has historically been favourable for stocks.
The second quarter earnings season has been strong in the USA: both net sales and earnings grew more than expected. The average earnings growth has been about 11 per cent, and net sales have increased by about 6 per cent, as nearly all companies have reported their results. Earnings growth has been driven particularly by technology and finance companies. In the telecommunications sector, earnings growth has been particularly strong, mainly driven by a few very successful companies. The earnings growth of the Magnificent 7 companies, which mainly consist of technology firms, has been 22 per cent so far, while NVIDIA has not yet reported its earnings.
In Europe, earnings have also exceeded expectations, growing by about four per cent, with around 70 per cent of companies having reported their results. Revenues have, in turn, contracted by an average of two per cent, which is slightly more than expected. Earnings growth has been driven particularly by the technology, healthcare and finance sectors.
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