Over the past few weeks, we’ve had hundreds of companies reporting on how much money they’re making and their plans for the future. Three quarters of the S&P 500 have released quarterly results, from Microsoft to Coca-Cola, and we’ve had a string of major UK names report too, like Unilever and NatWest.
In the US, 79% of companies have reported better earnings than markets had expected, and well over half have seen better revenues.
That sounds like a pretty good result so far, and broadly speaking, it has been. So why has market sentiment shifted in the past week and what’s causing stock markets to fall?
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest. Ratios also shouldn’t be looked at on their own and past performance isn’t a guide to the future.
Why are stock markets falling?
The first jitters came off the back of earnings from the ‘Magnificent 7’.
With only Nvidia left to report, we’ve got a pretty good picture of where the biggest US names stand. Results were good, but the outlook for the coming quarters was a little softer than many had hoped. The ‘AI trade’ is still in play, it might just take a little longer than first thought and cost a lot more.
Last week, we saw the Bank of England cut UK interest rates by 0.25% and the US Federal Reverse (the Fed) keep their rates on hold.
However, it was later in the week that several economic data points triggered fresh fears that the US economy could be about to waver, and the so-called ‘soft-landing’ was in danger.
What could be next for stock markets and investors?
Stock markets are now expecting central banks in the UK and US to push through a faster pace of rate cuts over the rest of the year.
Cutting interest rates is a good way to stimulate an economy, but investors don’t always react kindly to knee-jerk reactions.
With the US being such a major economic power, economic weakness over the pond has led to a shift in sentiment around global markets. Some investors have moved out of traditionally riskier investments like shares, taking shelter in areas like government bonds.
Economists are seeing a higher chance of a recession in the US, but they still think the odds are low. The latest Atlanta Fed nowcast, which incorporates data up until 1 August, is showing GDP growth of 2.5% (not in recession territory).
We don’t know whether a US recession will come and trying to catch a falling knife can end in tears, but it’s important not to abandon a long-term lens.
Tweaking your portfolio can be a good idea, however, now isn’t the time for rash decisions that could leave you worse off in the future. Times like these are a reminder to take a step back, assess the situation and make sure you have a well-diversified portfolio. That way you should always have something working for you, even if markets fall.
Time in the market and diversification have consistently been the bedrock of successful investing strategies. For investors owning quality companies over the long term, riding these waves is part of the journey.
With global rate cuts looking more likely for the rest of the year, explore our latest investment ideas that could benefit in a lower interest rate environment.