Update Equities: Living in a volatile environment
After a solid start to the year, markets recently took a breather, trying to capture the implications of all the moving parts that are playing out in financial markets.
Although the earnings season is, on balance, constructive, with the majority of companies meeting or beating analyst expectations; the rhetoric, actions and especially the unpredictability of US President Donald Trump is hanging above markets.
What is remarkable, however, is that so far this year, Europe is outpacing the US in terms of market returns. Europe, for example, was recently touching double-digit returns year-to-date, while the S&P 500 Index was only barely in positive territory. This was, of course, partly explained by developments in the IT sector, which has been underperforming the wider market year-to-date. This is in contrast to last year, when the IT sector, and, in particular, the Magnificent 7 stocks were driving US market returns higher. An illustration of softening sentiment for the IT sector is seen in the response to Nvidia’s earnings results this week. Although the company presented another quarter of breath-taking growth and provided a promising outlook with ongoing strong growth, the share price reaction was initially only lukewarm.
Although this trend might again change course, it appears that for now investors have been shifting gears towards other market segments that might be considered more attractively valued. This could also explain the revival of European markets and then especially the financials sector, which is showing the most favourable equity returns so far this year.
There are also a lot of moving parts playing in the background, especially on the geopolitical front, for example the Russia-Ukraine situation where the US is trying to strike deals and Europe is eagerly attempting to be part of the decision-making process. In addition, the US implementation of tariffs on its main trading partners, including Europe, Canada, Mexico and also China, will likely continue to lead to some uncertainty and volatility in financial markets. Having said that, if underlying global growth and earnings remain relatively well-oriented, markets should, in the end, be able to steer clear of the geopolitical turbulence.