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Market News Today – UK Plays Catch Up

The summer holidays may be getting underway but that doesn’t mean there isn’t plenty for investors to keep an eye on this week. Earnings, interest rates and a perkier UK market are in focus.

UK rallies hard

The last six months have been a massive disappointment for investors in the UK stock market. The FTSE 100 eked out a modest 1% rise last year, which was a stellar performance compared to the big falls registered elsewhere. So far in 2023, however, a 2% advance looks paltry against the 35% surge by Nasdaq, 18% for the S&P 500 and nearly 10% in Europe.

Last week, that changed with the UK benchmark enjoying a 3.1% return, its best performance in a five-day period since the first week of the year. The catalyst was a better-than-expected inflation print after a series of disappointing readings so far this year. Falling from 8.7% to 7.9%, the UK CPI led investors to reassess the future peak for interest rates and their trajectory thereafter.

If the narrative has changed on British inflation and interest rates, and if it triggers a turn for the market, then UK shares will benefit from the low valuations from which any rally will begin. The FTSE 100 trades 20-30% below rival markets like the US.

All eyes on the Fed

This week is a big one for interest rates, with the Fed likely to hog the headlines as it delivers what most expect to be one last quarter point hike before calling it a day for the current cycle. The case for pausing is even stronger after the recent drop in US inflation to just 3%, barely above the Fed’s 2% target.

Talk of a soft landing for the economy – a slowdown but no recession, sometimes known as an ‘immaculate disinflation’ – is back on investors’ radars. And that is helping to justify the improvement over the last nine months or so from a valuation multiple of about 15 times earnings to the current 20. That re-rating makes sense if earnings stop falling and expectations of a double-digit rally in profits next year start to look plausible.

A torrent of earnings

Which makes the current earnings season all the more important. And this week is shaping up to be one of the most important few days in that results calendar. That’s because the all-important tech sector is in focus with numbers due from the likes of Meta, Amazon, Alphabet and Microsoft. Tech stocks have single-handedly kept the market rally going this year, so investors need them to keep delivering the high growth rates for which they are prized.

When a market rally is so dependent on a small handful of companies beating expectations, it is vulnerable to disappointment. And that was the story last week as both Tesla and Netflix fell short of forecasts. Tesla was off nearly 10%, its biggest fall since January, after it announced slimmer profit margins. Netflix missed sales estimates and posted lower than expected guidance for the current quarter. Despite these two, earnings season is still looking promising – about 80% of the 90 or so companies to have reported so far have beaten forecasts.

Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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