U.S profits stay strong. But what about Tech?

Last week, the European Central Bank (ECB) lowered its key interest rates by 25 basis points, and Eurozone companies have begun to release their Q3 earnings reports. The ECB’s rate cut was expected—as in the United States and Canada, inflation fears are subsiding, and it is no longer necessary to keep interest rates as high. Furthermore, with economic data still being weak, this further strengthened the position to cut at this meeting. We expect the ECB, like their counterparts at the U.S. Federal Reserve and Bank of Canada, to continue down this rate-cutting path. The earnings story in Europe is similar to the U.S. in that good results were expected to come through, but different in that markets’ expectations aren’t as lofty. We believe that in some areas, like Financials, expectations are actually lower than they should be, and that there are opportunities for outperformance. As a result, we see some upside in European markets. But it’s also important to remember that unlike Canada and the U.S., Europe isn’t a singular economy—it’s a collection of many different countries’ separate economies, and it’s difficult to get all of those economies firing on all cylinders at the same time. Purchasing Managers’ Indexes (PMI)—which measure trends in manufacturing—are beginning to stabilize, which provides reason for some optimism, and tourism in places like Spain is doing well. But again, that performance isn’t uniform across the entire Eurozone. Germany continues to be the most important bellwether for the European economy, and it is facing real challenges in the automotive sector with respect to China, which is both the biggest purchaser of its cars and increasingly its biggest competition as a car exporter. This places German leadership is a bind; if they follow their allies’ lead and introduce tariffs on China to protect domestic automakers, they’d be taxing their biggest customer. That’s one of the reasons why we continue to be cautious about Europe.

Earnings announcements have also been rolling out on this side of the Atlantic, and so far, U.S. results have generally looked good. In particular, Financials reported some great earnings, which investors responded to well. Overall, investors seemed pleased with the earnings story, which is helping to drive markets higher. That said, the results we’re most eagerly anticipating are Technology companies’, which will be released throughout late October and November. As we’ve seen over the past several quarters, the bar for Tech performance keeps getting raised higher and higher as companies like Nvidia keep beating expectations. As a result, it wouldn’t be surprising if year-over-year and quarter-over-quarter growth starts to slow down somewhat. That ties into the rotation story: while we don’t necessarily expect big declines from the Tech heavyweights, we do expect to see money start to move from some of those big names into more Value-oriented segments of the market.

Last week in this space, I discussed volatility in Chinese markets, including Beijing’s efforts to address investors’ disappointment with the government’s stimulus measures. Since then, markets have continued to be underwhelmed. In particular, markets are disappointed in the lack of transparency and guidance coming from Beijing. If, for instance, the government had announced that the stimulus package would be in the $2-to-$3 trillion RMB (Chinese yuan) range, that would at least have given investors some basis for making informed decisions. Thus far, however, those kinds of details have been fleeting. Investors believe Beijing when they say that help is coming, but until they see further details and a real dollar amount, they’re likely to continue to approach Chinese markets with caution. If volatility persists, some dips may be worth buying. But as I mentioned last week, we view these as short-term trade opportunities rather than long-term holds. It is also worth noting that in the United States, consumers generally spend about 90% of what they make. That’s not the case in China, where the impulse is for consumers to save a larger portion of their income. This means than the impact of government stimulus may not be as great as it would be in other major economies. Markets at least have not fully given up on China, as we did see another positive bounce on Friday.

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Surprise, surprise: A U.S. job market that simply won’t quit.