The general mood in the markets in recent weeks has been positive for several reasons. Market expectations for a resolution to the Iran war have intensified, while positive earnings developments have further lifted the mood.
During May, hopes for a negotiated settlement to the war in Iran have strengthened, raising stock prices and pushing interest rates slightly lower. Among the latest developments, Iran delivered its response on Sunday to the USA’s proposal for a memorandum of understanding, on the basis of which peace negotiations could be initiated. President Donald Trump, however, has rejected Iran’s counterproposal as unacceptable.
Despite increased market optimism for an end to the war, the situation itself has not changed much. Both parties have continued small strikes in the Persian Gulf while exploratory talks are underway. With the Strait of Hormuz remaining almost completely closed, energy prices are expected to stay high for some time. However, a review of oil price expectations shows the markets anticipate prices will start to decline later this year.
In April, gains were seen in all major equity markets. Emerging markets were particularly strong, rallying over 15 per cent in the past month. This was driven especially by South Korea and Taiwan, as well as a few semiconductor manufacturing companies in those markets.
The US stock market has also risen, while in Europe the development has been more moderate. A key factor behind this is that the rally in May has been largely driven by the technology sector, whereas the recovery in early April was broader based. Many of the largest tech companies are American, and this small group has strongly driven the entire country’s stock market over the past couple of weeks. Tech companies have also performed well in Europe, but their share of the equity market is significantly smaller than in the US.
The equity market’s rotation away from tech companies towards other sectors was the prevailing theme in the markets at the beginning of the year. Now the market is wondering whether the rotation has continued, to which the answer is twofold – yes and no. When positive news emerges from the Middle East, the markets react broadly positively. Conversely, when negative news surfaces, it is primarily technology companies that see gains. These observations both support and challenge the idea of rotation.
With around 90 per cent of US companies having reported their earnings, it is safe to conclude that companies are currently performing very strongly. Average earnings growth has been roughly 25 per cent, which clearly exceeds expectations. The average 10 per cent growth in net sales has also been slightly stronger than expected.
As usual, growth in the tech sector has been robust. The average earnings growth of the Magnificent 7 companies has been 52 per cent, with NVIDIA’s results yet to be released. Other sectors have also performed well across the board. As a result, earnings growth expectations have also clearly increased in recent weeks, and earnings growth of up to 21 per cent is expected for the USA this year.
In Europe, the earnings season has also been satisfactory. Around two-thirds of companies have reported their results, and average earnings growth stands at 8 per cent. Meanwhile, average net sales growth has stagnated at zero, in line with analysts’ expectations.
While the majority of companies in the USA have exceeded expectations, the overall picture in Europe is more divided. The energy and telecommunication sectors have performed strongly, whereas the figures reported, for instance, by the automotive industry and the materials sector have been weak. Europe’s earnings growth expectations for this year have dipped slightly as the earnings season has progressed and currently stand at around 12 per cent. If this level of earnings growth is achieved for the year, it would be a positive outcome, although not as high as expected just a couple of weeks ago.
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