After a dramatic six months of policy turbulence and volatile markets, investors are pausing for breath. The summer lull has come early but shares seem happy to hold onto their dramatic rally since the April low.<\/p>\n
The six-month scorecard<\/p>\n
Donald Trump returned to the White House on 20 January. Since then, he has dominated the news headlines like no other President. And a huge amount of policy uncertainty has been reflected in a rollercoaster ride for financial markets.<\/p>\n
Shares peaked in February then suffered their worst fall since the start of the pandemic after the announcement of swingeing tariffs in early April which threaten to push the average import levy to the highest level in more than 100 years.<\/p>\n
But, since then, shares have bounced back and more. The S&P 500 is at a new all-time high at around 6,300. The FTSE 100 is flirting with a close above 9,000 – last week it broke through that level, but only intra-day.<\/p>\n
In other markets, too, there have been significant moves. The US dollar is having its worst year since 1973 as the haven role of the US currency is questioned amid concerns about the sustainability of US budget deficit, the impact of the President\u2019s economic policies and attacks on Federal Reserve independence.<\/p>\n
Meanwhile, the so-called Big Beautiful Bill promises a short-term sugar rush of growth on the back of regressive tax cuts but longer-term concerns about the spiralling level of US debts, which are forecast to grow by at least another $3trn over the next ten years.<\/p>\n
What\u2019s driving shares higher?<\/p>\n
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.<\/p>\n
A higher price-earnings ratio<\/a> 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\u2019s remarkable after the strong 20%+ rallies in 2023 and 2024.<\/p>\n And it\u2019s 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.<\/p>\n Earnings season<\/p>\n It\u2019s 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\u2019s 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%.<\/p>\n This week sees a wide range of companies reporting. Highlights will include Alphabet<\/a> and Tesla<\/a>. Tech stocks have been a key driver of the recent rally, with both Microsoft<\/a> and Nvidia<\/a> back into record share price territory and Alphabet and Apple<\/a> well off their spring lows.<\/p>\n Also on the radar this week<\/p>\n 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\u2019s 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.<\/p>\n Closer to home, 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.<\/p>\n If you\u2019ve got a burning question you want to ask, why not drop us a line?<\/p>\n