Another strong month in financial markets. The ASX 200 improved nearly 2%, following the lead from the USA, with the S&P 500 up about 3% resetting record highs. In the US, technology stocks have fuelled record market growth in recent months as investors focus on the AI expansion. So far, around 80% of S&P 500 companies reporting earnings this season have beaten estimates, according to FactSet. Domestically, most ASX listed companies will report FY24/25 earnings in August.
ASX 200 Chart (1-month)
Some indicators suggest a sluggish underlying economy. For example, unemployment edging up as governments (state and federal) curtail spending and expansion of the government workforce. However, it is important not to confuse the market with the economy. Whilst the state of the economy does impact earnings, consumer demand and confidence, there are many other positives to take out of the current environment.
- Lower costs (higher margins)
- Energy costs have fallen
- Labour costs are falling due to tech and AI (anticipated to accelerate)
- Interest rates are forecast to fall to stimulate the economy. This tends to benefit investment markets.
- Governments globally continue to spend / print money, which has an inflationary impact of asset prices.
In fact, when looking at the money supply, the market has underperformed on an historical basis.
Also, in the US, the Trump administration is lowering corporate taxes and reducing regulation. The market appears cautiously optimistic about trade deals and better-than-expected economic data. Risks (upside and downside volatility) are always present when investing. Commentators tend to focus on the negatives, as bad news sells newspapers. It is also very important to consider drivers to the upside, which has been the long-term direction of the market.
Alex Leyland