July brought significant volatility to the markets. In the United States, there was a notable shift from the year’s high-performing tech sector to smaller companies. These smaller firms, previously oversold and undervalued, experienced a resurgence. This shift was driven by expectations of Federal Reserve rate cuts following a period of falling inflation. The tech sector’s recent sell-off is viewed as a healthy correction, not a cause for alarm. Despite this, tech companies are expected to maintain strong earnings growth, bolstered by advancements in AI.
The earnings season in the US has been promising, with year-on-year growth reaching double digits, largely thanks to major tech companies like Apple, Amazon, and Microsoft. Excluding these giants, earnings have still seen high single-digit growth, surpassing expectations. However, there are notable differences among companies. Consumer-facing businesses have generally reported weaker results, highlighting a decline in consumer spending. This weakness is particularly evident in European luxury companies, which attribute their slower earnings growth to reduced spending by Chinese consumers.
The economic outlook in the US remains positive, with GDP increasing by 2.8% in Q2, exceeding forecasts and improving from Q1. The resilience of the US economy supports the view that the current business cycle will last longer than anticipated. Conversely, Europe’s manufacturing sector continued to contract in July, raising concerns about the durability of its growth recovery. However, strong real wage growth and anticipated interest rate cuts are expected to support European growth throughout the year.
Inflation in both the UK and US is making substantial progress towards the 2% target. This has led to a more dovish stance from the Federal Reserve and the Bank of England (BoE). The BoE implemented its first rate cut, lowering the key rate to 5%. However, both the BoE and the European Central Bank are maintaining a data-dependent approach, suggesting that the rate-cutting cycle will be less aggressive than previous ones. The Federal Reserve, during its July meeting, indicated a possible rate cut in September, citing significant progress on inflation. This clear signal led to a strong market response, with the S&P 500 and Nasdaq recording their best day since February.
July was marked by significant market shifts and economic developments, underscoring the dynamic nature of global financial markets and the ongoing efforts to manage inflation and sustain growth.
Arbuthnot Banking Group PLC (LON:ARBB), trading as Arbuthnot Latham, provides private and commercial banking products and services in the United Kingdom. Founded in 1833, Arbuthnot Banking is based in London, United Kingdom.
