Markets have recuperated quickly from the geopolitical turmoil. At the same time, investors’ focus has clearly shifted to the positive development in the technology sector and the newly commenced Q1 earnings season.
As a market theme, the Iran war appears to have faded somewhat into the background at least for now, and the situation has changed very little from the investment market perspective over the past couple of weeks. Shipping in the Strait of Hormuz is still floundering, but the markets mostly appear confident that the crisis will soon be solved through negotiations.
Equity markets have recuperated quickly from the plummet in March and some areas are even showing new all-time highs. In the corporate bond markets, credit spreads have fallen and recovered from the spike that took place in March.
However, as a result of the crisis, interest rates remain at higher levels than before. If the crisis were prolonged, inflationary pressure would grow, prompting central banks to tighten their monetary policies. The fixed income markets are now pricing in the risk of this happening, although the general expectation is that the crisis will be resolved soon.
More information will be available on the Fed’s and ECB’s thoughts this week, after both central banks hold their meetings. Neither is expected to change its monetary policies; both are likely to wait and see how the situation in the Middle East develops and what economic data emerges in the coming weeks. If the situation in the Middle East remains unresolved and inflation accelerates, interest rate hikes could be on the agenda at their next meetings in early summer.
In April, price increases were observed across all key markets on a geographically broad basis. Especially the emerging markets and the more subdued US tech sector have shown strong performance during the recovery period. Once again, investors’ minds appear to have been engulfed by optimism concerning the technology sector’s growth.
The stock price rise has been broad and the only exceptions to this are the declining energy sector and low-return consumer staples sector. Also utilities, in which, for example, different energy-producing companies are broadly weighted, have shown more subdued development. Especially the information technology and materials sectors, as well as consumer discretionary, have yielded strong returns.
The fast price rally caused valuation levels to rise slightly, although not yet to the levels preceding the Iran war.
The Q1 earnings season has kicked off on a positive note on both sides of the Atlantic.
With around a quarter of US companies having reported their earnings, both the 25 per cent earnings growth and average 10 per cent increase in net sales exceed expectations. As usual, tech companies in particular showed robust growth, but also the materials sector experienced rapid earnings growth. This week is pivotal for the earnings season, with numerous earnings reports expected – including from many major tech companies over the next few days.
Also Europe’s earnings season has had a promising start, although just a small proportion, around a fifth, of companies have released their earnings. Earnings growth met expectations, coming in strong at some 18 per cent, while the average increase in net sales is close to zero in the companies having reported their earnings so far.
At this stage, it is too early to draw any definite conclusions concerning Europe’s industrial figures, as in many sectors only a few major companies have reported their earnings. For now, however, the big picture is more mixed than in the United States, and Europe has sectors where earnings have shrunk, failing to meet expectations.
In recent weeks, earnings growth expectations have grown significantly in all markets. Earnings growth expectations for the USA have been 19 per cent for this year and the corresponding figure for Europe is 18 per cent – both clearly higher than at the start of the year. The emerging markets are forecast to achieve close to 40 per cent earnings growth.
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