Although uncertainty remains, strong corporate earnings continue to underpin equity markets, and the investment outlook remains constructive. However, a resilient economy in the face of high energy prices complicates the U.S. Federal Reserve’s task, explains our investment strategist Louis Lajoie in just 5 minutes, with 4 charts and 3 takeaways.
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Hello, everyone. Today, June 12, I’m going to briefly look back on the investment backdrop: what is reassuring, what is perhaps a bit concerning, and what we’re going to be monitoring going forward.
But before we do so, let’s just go back to where we were three months ago, at the time of the last webcast, which was just at the beginning of one of the worst energy crises in modern times. Back then, there were essentially two prevailing narratives: either oil prices were headed to $200 a barrel, in which case we would have a global recession, or there would be a swift resolution allowing prices to go back to where they were. What actually happened? Something in between, where in the absence of a resolution, oil markets, nonetheless, found somewhat of an equilibrium, thanks to greater usage of some pipelines, the fact that the respective blockades are slightly permeable, and, most importantly, the substantial use of global oil reserves, which, by definition, means that this balance is temporary. We’re going to have to see a greater pickup in maritime activity in the Persian Gulf very soon. But regardless, in any event, what has become clear now is that energy prices are not going to go back to their previous lows. They’re going to remain higher.
The good news is that we’re seeing this is not preventing equity markets from renewing with an upward trend, which has been the story in the second quarter, as you can see here. And this rebound in stock prices has not been driven entirely by hope. It’s actually been driven by substantial and sustained earnings growth around the world, with earnings growth actually stronger than the increase in stock prices since the beginning of the year. That is, in part, reflecting substantial earnings gains for a few stocks involved in semiconductor manufacturing, notably in emerging markets.
But globally speaking, it remains true that economic activity has remained rather positive, with, for instance, the U.S. Economic Surprise Index at its highest level since 2024. That is also good news. But it also raises questions about the future path of inflation, because we all know that inflation reacts with a lag to growth. We saw an extreme case of that in 2021 and then the inflation surge in 2022. That has not been the case in the last two years, most likely because, over that period, the labour market was much more balanced, and that remains the case for now. And so that is why this is a risk to us, not a view.
What’s clear, though, is that markets are going to be paying a lot of attention to what the U.S. Federal Reserve is about to do against this rather complex backdrop, especially since we are going to be facing, for the first time in eight years, a new Fed chair, Mr. Warsh. Just three months ago, markets thought that he would probably be able to cut rates slightly. But lately, markets have actually been discounting perhaps a few rate hikes going forward. We’ll have to see. But even if rate hikes actually do happen, in our mind, this is not necessarily a problem, in the sense that it is much better to have roughly neutral monetary policy than perhaps overly accommodative interest rates, which would only create a bigger inflation problem down the road. But if we were eventually to talk about restrictive monetary policy, that would be a different discussion. And that is the risk we’re going to be monitoring, but that is not the expectation as we speak.
Three takeaways for you today. Essentially, again, the worst has been avoided and is likely to continue to be avoided, even though we don’t expect perfect stability here in the Persian Gulf. That is why we’ll have to keep an eye on inflation, which is definitely not on track to go back to the 2% target, something we haven’t seen in just over five years now in the U.S. We’ll have to see how Mr. Warsh navigates all of this. But globally speaking, we don’t expect any massive changes in global trends, which are rather positive for equity markets, as we have seen. But we must remain vigilant here, because the fact of the matter is that the range of outcomes, the range of uncertainty, remains exceptionally large.
That’s it for today. Thank you for listening. We’ll talk again in September. Have a great summer, everyone.
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