Market Review – Quarter 3, 2023

All figures mentioned in this article are total return and quoted with GBP as the base currency, and are accurate as at time of writing.

Please note, the value of your investment can go down as well as up so you might not get back the amount you put in. Past performance is not a guide to future performance. The views expressed here should not be taken as recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.

Q3 – earnings season

With nearly half of the companies within the S&P 500 Index releasing their results, Q3 earnings season is well underway. 78% of these companies have beaten earnings expectations, with the leading sectors being information technology, communication services and healthcare, according to FactSet.

Energy companies and utilities have however seen weaker results. Data from Mastercard and Visa offered useful insight into the state of the consumer, with both suggesting that consumer spending is stable this year, across all segments.

For the second time this year, Coca-Cola raised its annual sales and profit forecast. In Q3 Coke’s average selling price rose 9%, while achieving the same volume in sales, which tells us that there’s still strong consumer demand despite higher prices.

‘Big tech’ companies reported a mixed bag of results. Microsoft led the way, reporting an increase in profit margins following demand for its cloud software driven by AI (Artificial Intelligence). But Google lagged as its revenues from its cloud business were actually lower than expected.

A US growth uptick

The US economy continues to be resilient. In Q3 2023, economic growth surpassed expectations at 4.9% annualized, the fastest growth rate in two years. The US labour market also remains strong. Unemployment is still low and initial jobless claims have declined. 

Overall, the Q3 company’s earnings results are in line with the economic data. However, some companies did highlight they’re expectations of weaker earnings in Quarter 4.

The US economy continues its resilience, which has contributed to recent bond market volatility. Against the backdrop of investor concerns, US 10-year bond yield exceeded 5% this month — the first time they’ve reached this level since 2007.

Central banks on pause in the UK and Europe

In the UK, September saw inflation remain higher than expected. The Consumer Prices Index (CPI) rose 6.7% per annum vs a 6.6% forecast – the same rate as we saw in August. Core CPI (the metric that removes the volatile inputs like energy and food) increased to 6.1% per annum, against 6.2% in August. The inflation rate of services rose to 6.9% from 6.8%, and remains sticky.

UK economic data is showing some signs of slowing. Unemployment has reached c.4.3%, and job vacancies have declined. However, at a rate of 8.1%, including bonuses, wage growth remains strong, and it’s expected that the Bank of England will keep interest rates unchanged. We’re neutral about UK equities at the moment, and we think sticky inflation will continue to have an impact on investor sentiment more broadly.

The European Central Bank (ECB) kept interest rates at their current 4%, amid eurozone inflation declining (4.3% year-on-year in September vs 5.2% for August), and the economy showing weakness, with numerous business surveys showing contraction in activity this month.

Geopolitics and markets

The weight of geopolitical conflict has been a major concern in recent times, impacting both food and energy prices. In response to the collapse of the Black Sea Grain deal (the trading corridor allowing Ukraine to export grain) earlier in the year, the International Monetary Fund (IMF) stated that grain prices could increase by around 10-15%.

In October, we saw the outbreak of conflict in the Middle East. This has raised serious humanitarian and economic concerns across the board. However, to date its impact on financial markets has been fairly subdued; Brent Crude climbed to c.$93/barrel, but remains below c.$96/barrel (its recent peak). But if countries like Iran and Saudi Arabia become more involved and the conflict escalates, oil prices could be driven higher as the region accounts for a significant portion of global oil production.