Investors’ Outlook: And now for something completely different

And now for something completely different

Markets have been digesting a sequence of events, including the largest initial public offering (IPO) in history by Elon Musk’s SpaceX¹, the announcement of a pipeline of massive AI-linked capital and debt issuance, and the prospect of tighter monetary policy. The European Central Bank has already kicked this about-face off, which was widely expected, though investors are now wondering whether it will be a one-and-done move or the first of several this year. We’ve previously argued that the Eurozone recovery is fragile and that tighter policy is unlikely to help.

All of this raises the question of whether markets can continue to grind higher because, even with a signed agreement between the US and Iran that reopens the Strait of Hormuz, the economic fallout from the war won’t just disappear overnight. More hawkish monetary policy is poised to weigh on price-to-earnings (P/E)² multiples. We believe that for equities to advance from here, companies will need to deliver more on the “E” side of that equation.

In our view, the June sell-off in the technology sector is a byproduct of that adjustment. Investors seem less willing to extrapolate positive developments into ever-higher valuations and have become more discerning. Optimism has so far been tied to AI infrastructure spending, which has been tangible and relatively easy to assess. But the next step is monetization, which is more intangible and has pit-ted believers against skeptics. As we move into this next phase, the skeptical voices are slowly getting louder. Investors seem more focused on what companies can deliver than on what they might achieve several years down the road. That’s a departure from the pandemic years, when the Cathie Wood investment philosophy³ found an especially receptive audience among retail investors. At the time, much of the market was willing to overlook traditional valuation metrics and pay premium multiples for companies perceived as disruptive, high-growth innovators. In our view, a more balanced approach is positive, and as such, we believe the consolidation was healthy, especially as the longer-term outlook looks robust to us. However, we believe an expectation reset was needed.

The US Federal Reserve (Fed) held interest rates steady but left the door open to rate hikes. While our base case is that the Fed will hold off until September before raising rates, a summer move probably wouldn’t come as a big surprise. Given the Fed’s dual mandate and a labor market that has kept adding new jobs, policymakers may be in a position to tighten without doing too much damage to the economy.

In this Investors’ Outlook, you’ll find our views on the UK economy, the wave of IPOs and what it could mean for market participants, and the implications of El Niño for commodity markets. This publication will now enter its summer intermission and will be back with new insights in its September issue. In the meantime, we wish you a summer of pleasant surprises and very few entirely unexpected ones.