Equity markets recovered further last week with global equities rising 1.8% in sterling terms, helped in part by the pound falling back below $1.30. These gains leave global equities down all of 1% below last year’s high and in the case of the US they have actually been testing their previous high. By contrast, the UK and Europe are still 5-6% off last year’s peak, emerging markets down 7% and Japan 11%.
The equity rally has been given added fuel in recent weeks by signs that global growth is starting to bottom out. And on first sight, Friday’s US Q1 GDP numbers were very reassuring on this front with growth picking up to a stronger than expected annualised 3.2% from 2.2% the previous quarter.
The details, however, were distinctly less impressive with underlying domestic demand growing only 1.3%, the slowest rate since 2015. Given this mixed picture, this coming week’s spate of US data releases will be of heightened importance for markets.
The US earnings season is now in full swing and, with some 45% of the S&P 500 reported, is following its usual course – namely earnings estimates are being revised up over the course of reporting, having been cut in the run-up. Even so, we are still looking at US earnings barely posting any growth at all in Q1.
The hope is that US earnings growth will recover later in the year. While we do expect this quarter to be the low point, consensus forecasts that earnings growth will be back in double digits by early next year look far-fetched. Indeed, profit margins could come under pressure from larger wage increases as companies find it hard to pass on these cost increases to final prices.
Short term, we are sceptical that equities can continue their upward march for much longer given the size of the bounce already seen. The recent strengthening of the dollar and bounce in oil prices are also potential headwinds. But as we mentioned last week, we are more comfortable on the longer term outlook for equities than before. Consequently, we are increasing our equity exposure a little although our positioning overall will remain on the cautious side.