Please see below, an article from Tatton Investment Management, analysing the key factors currently affecting global investment markets. Received this morning – 01/09/2025
Refuelling pause in markets
It was another quiet week for markets. Nvidia’s Q2 earnings were expected to give some clues about the AI investment theme, but US markets didn’t react much. Nvidia shares themselves fell, despite the chipmaker exceeding its high expectations. There’s a sense that the company is plateauing, as big tech moderates its investment in AI infrastructure. But that tech money is now more likely to come back to shareholders as buybacks or dividends, benefitting investors. That doesn’t mean the AI theme is over; it just means that not all the AI spending will go to Nvidia. We see that as a positive.
There was some suggestion that policy risks stopped markets from moving ahead, backed up by higher government bond yields (covered below). Trump’s attempt to replace a Federal Reserve governor is concerning, but even if he succeeds we don’t think it will give him full control over US interest rates. France’s potential government collapse is a threat to the euro, but judging by the currency’s strength this week, markets don’t rate the risk highly (though it does take the shine off European stocks). Meanwhile, UK stocks sold off, thanks to rumours of a tax raid on banks.
The underlying story is that stocks are fizzling out everywhere. That’s partly about high bond yields making risk assets relatively less attractive, and partly about weaker liquidity than over the summer. The US government’s Treasury General Account (TGA) has been in drawdown for months (due to debt ceiling constraints) which effectively meant Washington was pumping money into the financial system. But the TGA is now building back up, tightening market liquidity.
With less fresh cash around, investors have to sell assets if they want to buy stocks. They might do so, but they will need a good reason, and at the moment there are not enough new catalysts for extending the already healthy optimism much further.
Who’s afraid of higher yields?
30-year government bond yields spiked last week. In Britain and France, this was presented as a story about stagflation and failing fiscal policy. In the US, the focus was on Trump’s attack on Federal Reserve independence, and its effect on future inflation. But looking at little deeper at how bonds moved, those narratives don’t stack up.
We can break up bond yields by three major influences: inflation expectations (measured by comparing inflation-linkers to nominals), credit risk (comparing government bond yields to interbank swap rates with their central banks) and real (inflation-adjusted) yields, which are strongly linked to the market’s growth expectations.
Neither the credit risk nor inflation components moved particularly to explain why long bonds spiked. If higher yields were a vote of no confidence in governments, credit risk would go up. But it barely moved in the US and UK. France’s did spike as we would have expected, but it’s still lower than the start of the year. The US saw a minor increase in implied inflation last week, but expectations are still lower than the start of 2025 – while Britian and France’s implied inflation didn’t move.
Bond markets were driven by a substantial increase in real yields. So, if you ignored the doom and gloom and just looked at what bond markets are telling us, you would think growth expectations have improved.
Market expectations could be wrong of course. But that would suggest real yields are too high and should come down – meaning long bonds are a good buying opportunity. Either way, there’s no reason to panic. You might think markets are underestimating inflation or credit risk, but few other signs back that up. The only sign of anxiety is the weakness of the dollar, but you could just as easily chalk that up to slower profits. In any case, we see last week’s bond moves as a curiosity – yes – but not a cause for particular concern.
US Earnings Update
Most of the Q2 US earnings reports are in, and research house MRB found last week that S&P 500 companies showed 13% year-on-year growth, while 80% of the index’s companies beat analyst expectations. That analysis came before Nvidia marginally beat its sky-high earnings expectations – though the chipmaker’s good performance wasn’t enough to sate investors expecting the phenomenal.
We expected a strong US earnings ‘surprise’ – given how analyst forecasts had been revised down by tariff fears. It was especially strange that, in Q1, better-than-expected earnings didn’t bump up the future forecast as it should. Any tariff reprieve was likely to mean better earnings, exactly as transpired.
We should also keep in mind that US tariffs have not fully filtered through to company costs, either because they’re delayed or because US importers are still working through inventories. The inequality of US earnings is another important caveat: big tech still dominates, while most other sectors are middling. The weakness of the dollar in Q2 also helped companies with international revenues (again, big tech) while smaller domestic companies struggled. Russell 2000 earnings were lacklustre, for example.
It’s not just tech that did well: financials also beat expectations by an aggregate margin of 13.9%. That’s an encouraging sign. If tariffs were compressing the US economy, you would see default rates go up – meaning non-performing loans and hence weaker bank profits. The fact banks did well suggests there are few signs of credit stress, especially with an interest rate cut coming up.
This doesn’t mean everything’s fine. MRB point out that earnings forecasts for the next few years are pretty optimistic about profit margins – which will be hard to maintain once tariff effects are felt. There are challenges ahead, but for the moment the US earnings outlook doesn’t foretell any doom and gloom.
Please continue to check our blog content for the latest advice and planning issues from leading investment management firms.
Marcus Blenkinsop
1st September 2025