Sunshine on the market
The summer months pampered both the equity and fixed-income markets. In the USA, the S&P 500 Index kept climbing, reaching new peaks one after the other and rising by over 5 percent during June and July. The European Stoxx Index also reached an all-time high, although its change in the summer months was only 3.5 percent.
The Finnish and Nordic equity markets rallied eight and seven percent, respectively. Long-term interest rates fell by around 0.3 percentage points in both the USA and the euro zone. A good two-thirds of the interest rate rise that was seen in the first half of the year has now been reclaimed.
Asian equities, however, backpedaled. In China, the equity markets were hit by private education companies having fallen under scrutiny by the authorities, whose measures are a continuation to the tightening of regulation and control seen during the year in financing, online transactions, mobile applications, and the real estate sector.
The fear on the Chinese market is that the authorities will turn their attention to the health care and gaming sectors next. The decline in the Chinese equity market also depressed other Asian markets and the emerging markets’ index as a whole. In Japan, on the other hand, the equity markets were treading water.
Confidence on the market
Market sentiment regarding current risks was confident. The spread of the Delta variant of the coronavirus does not appear to be increasing hospitalization or deaths thanks to vaccination rates approaching a level sufficient for herd immunity in Western countries. As restrictions on movement are gradually lifted, it is believed that life will return to normal.
The continuing rise of inflation did not disturb the markets, either. In the USA, inflation continued to rise in June and reached 5.4 percent. The annual US inflation rate has now remained at above 4 percent for three months. At its July meeting, however, the Fed confined itself to maintaining its current policy because the country’s economy had not yet strengthened enough. In fact, the decline in long interest rates and the levelling of the yield curve on the fixed-income market may well reflect market confidence that inflation will level off. The European Central Bank also maintained its existing policy and did not make any changes.
Companies report top results
By the end of July, about half of the S&P 500 index companies had reported their results, and nine out of ten exceeded analysts’ estimates. The average earnings growth in the second quarter was 85 percent and net sales increase 21 percent. Revenues and profits of FAANG and tech companies were particularly strong, with the exception of Netflix. The performance of growth company stock was relatively strong during the summer, but since the earnings reports, the trend has slowed down slightly.
In Europe, companies also reported strong and better-than-expected earnings and revenue growth. In the second quarter, earnings increased by 120 percent on average and revenues by 20 percent. As expectations regarding profit performance for the rest of the year and for 2022 have been adjusted upwards, market valuation levels are now moderate and validate the rising share prices.