Market snapshot: keeping a lid on sentiment ahead of new acid test

Company results are giving investors plenty to think about, while data indicates a weakening economy. Our head of markets talks through latest developments.

Mixed company earnings and softening economic data are keeping a lid on sentiment, as investors ponder the timing and depth of a potential recession.

Disappointing Tesla Inc (NASDAQ:TSLA) earnings dragged on a Nasdaq index which has otherwise been the star of the show in US markets this year. Profit margins at the electric vehicle maker are under pressure as car prices have been cut, and a net income decline of over 20% from the previous year sent the shares sharply lower.

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Indeed, margin erosion in the face of higher inflation has been a developing theme in the earnings season so far. The lack of concrete forecasts from corporates has been another concern, and a general earnings decline is still expected.

Against extremely low expectations, most companies have beaten earnings estimates, although next week will provide another acid test. A whole raft of earnings are expected from the likes of Amazon.com Inc (NASDAQ:AMZN), Alphabet Inc Class A (NASDAQ:GOOGL), Meta Platforms Inc Class A (NASDAQ:META), Microsoft Corp (NASDAQ:MSFT), McDonald's Corp (NYSE:MCD), General Motors Co (NYSE:GM), Exxon Mobil Corp (NYSE:XOM) and Chevron Corp (NYSE:CVX).

The oil majors will be able to update on the current state of trading, with the oil price having been under pressure on the back of weakening demand and down by 5.7% in the year to date.

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Meanwhile, the economic data continues to be released thick and fast, and for the most part are signalling a slow grind towards a contracting economy. The most recent data saw a larger-than-expected fall in the manufacturing index in the US, higher jobless claims and lower home sales. At the same time, the US Leading Economic Index dropped to its lowest level since late 2020, and implied that a recession could come within the next few months. 

The combination of tepid news meant that the main indices weakened for the day, although the general direction of travel remains positive. In the year to date, the Dow Jones has added 1.9%, while stronger gains have been experienced in the S&P500 and Nasdaq, with rises of 7.6% and 15.2% respectively.

Another mixed session in Asia overnight left the UK markets with nowhere to go in opening trade. In addition, a weaker-than-expected retail sales figure provided further proof, if it were needed, that high inflation and the general round of cost of living pressures are having an increasing impact on consumer spending, particularly more discretionary items.

With food inflation continuing to spike and with the Bank of England’s interest rate hiking policy almost certainly having further to go, demand could well remained subdued for the time being.

Even so, there remain elements of optimism such as, for example, the airlines which have recently been reporting strong summer bookings and a near return of passenger numbers to pre-pandemic levels. For its part, the domestic barometer which is the FTSE250 has held on to its gains so far this year, although the opening decline reduces that gain to just 1.3%.

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The premier index also struggled to make headway in early exchanges, although the defensive nature of many of its constituents continues to come back into focus. A raft of stable, cash generative companies, many of which benefit from pricing power which gives some protection against inflation, are potentially theme trades as economic pressure tighten.

While weakness in the mining sector overpowered some tentative defensive gains at the open, the FTSE100 remains ahead by 6% in the year to date amid the continuing volatility.