Tuning out market noise, looking ahead to Q3 earnings

‘Focus on the fundamentals’ is a good rule of thumb for long-term investors. But that’s been hard amid the recent turbulence. All year, markets have fluctuated between fears of recession and fears of an inflationary resurgence. But they have nonetheless continued to charge ahead towards all-time highs. In this environment, we have deployed a clear and robust investment strategy, and we have translated this into very solid performance for our clients’ portfolios. Our macro analysis of economic drivers still suggests a soft landing ahead. This anchors our portfolio positioning, while we constantly assess tactical opportunities, and whether new data confirm or question our base scenario. Recent swings in market sentiment lean towards expectations of higher demand and inflation. This has been prompted by China’s renewed stimulus push that could provide a firmer floor for its growth in 2025, robust US jobs data, and geopolitical risks that threaten higher oil prices. 10-year Treasury yields have risen above 4% again as markets have priced out US rate cuts. However, I struggle to see the arguments for much higher inflation, barring of course a significant supply shock in the Middle East that drives oil prices above USD 95 per barrel. We still expect 25 basis point cuts at each Federal Reserve meeting going into 2025. Labour markets are cooling and a spike in wage growth seems unlikely.

However, a rise in real interest rates has seen gold prices correct, which presents an opportunity for long-term investors to increase their holdings. The VIX index of US stock volatility is above its long-term average of 20, understandable in the month before a nail-biting US presidential race. As mentioned, stock markets are riding at all-time highs and our portfolios have participated directly in the year’s rallies. We maintain a constructive 12-month view, based on earnings growth and a falling cost of capital, amid the rate-cutting cycles in major markets. In line with typical trends, analysts have lowered their earnings estimates as we head into the third quarter earnings season. Consensus currently expects earnings at large US firms to grow 5% on the previous year. To me, this looks like a low bar to clear, especially given resilient macro data in recent months. Meanwhile, equity market leadership has broadened, and cyclical stocks have started to outperform defensive ones again; we still prefer the materials and energy sectors. Beyond the noise therefore, market fundamentals still look sound. Nevertheless, long-term investing demands the highest vigilance as we begin preparing for 2025. Our Investment Committee this week will take stock of evolving asset class dynamics and opportunities. Stay tuned for more.