This is the time of the year when market activity is deemed to grind to a halt. But it might be more accurate to say 'out of sight, out of mind' – August is often when day-to-day events are ignored in favour of some much-needed downtime.
Those taking a break will certainly feel a little happier than they did this time a month ago, because July brought a welcome respite from 2022's difficult markets: it was the best month for the S&P 500 since late 2020. If you believe the numerology, that was to be expected: since 1928, the average return for the US index in July is 0.3 percentage points above that of any other month, according to Yardeni Research. The approaching holidays make for something of a caution-to-the-wind mindset.
That desire to down tools also extends to companies themselves. Our companies pages this week contain some 63 interim or full-year results. There are similar bunchings in March and September, but the urge to clear the decks prior to an August getaway always tends to produce the most voluminous group of figures.
Under the circumstances, plenty of these results look pretty healthy. Profit warnings across the market as a whole are undeniably on the rise, but our pages detail companies that are by and large doing a good job of managing higher costs. Nor is demand withering away yet, either.
Yet businesses are understandably cautious. Yes, many are sounding bullish on full-year outlooks – although this may well be more common among the larger caps of the UK universe. Market-wide, guidance being is being reined in. Liberum analysts note that earnings per share estimates have been cut back over the past month, particularly for small and mid caps (although in many cases these estimates had looked optimistic for several months now). And more than one company this results season has referenced profits or revenues that are now particularly “weighted towards the second half”. That may prove a hard ask.
There are plenty of known unknowns in the months ahead – the extent of, and knock-on effects from, higher energy prices chief among them – but investors are at least being reasonably well compensated in the meantime. The FTSE 100 is now trading at just over 10 times 12-month forward earnings, with the FTSE 250 at 12.4 times – both of which are cheap, according to Liberum's analysis. Small caps offer a further discount to mid and large caps. On the assumption that reality has now caught up with earnings expectations, that’s some solace.
The big question for the coming weeks remains what will happen to the path of monetary policy. Part of the reason for July’s rebound is that markets are starting to price in a pretty unusual state of affairs in the US: another 100 basis points of hikes over the next year, followed by 50 bps of cuts the year after. Analysts at RBC say that futures curves have never before forecast such a swift divergence in policy.
Perhaps this is simply an admittance that no one knows anything. Still, central bankers continue to try to talk a good game. The Fed may be trying to move away from forward guidance (as Hermione Taylor writes here), but several of its policymakers have nonetheless made hawkish noises over the past week, seemingly in a bid to dissuade investors from pricing in future easing.
Amid all that confusion, then, it can be satisfying to know there are some things that are in investors’ own hands. Whatever the macro winds that bluster or boost a particular company, the fundamentals are always ready and waiting to be examined. Our cover feature this week provides plenty of tips on how to spot accounting oddities. But it’s not just about finding frauds: this is the kind of analysis that private investors can do on all the companies in their portfolio. If August does prove quiet, there’s no better time for a bit of research.
