Oil spike, equity rally and earnings reality check | Monthly Investment Insights

Get the latest market perspective from Chief Market Strategist Guy Miller in his new Key Investment Insights video.

This month's key points:
- Oil prices still extended as the Strait of Hormuz remains closed
- Stocks rebound as investors put the war behind them
- Corporate earnings are strong, with expectations are rising

Transcript

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[Music starts, Title: Coming soon] With equity markets at record highs, investors have now turned their attention to stellar corporate reporting rather than the war[Music ends] that still is ongoing in Iran.

Guy Miller, Chief Market Strategist & Economist, Zurich Insurance Company: 0:10

Welcome to key points for May. This month we look at the sharp rebound in the price of oil and ask what could this mean for global growth. We turn our attention to the V-shaped recovery in equity markets and say is this really justifiable? And we look the corporate reporting season and ask are corporate earnings actually living up to very high expectations. Now turning to our first point. Oil prices have rebounded really quite sharply in recent days and weeks. If you look at the chart I'm showing you here, the blue line is Brent Crude. And it had pulled back quite significantly as it was a ceasefire and it was dialog between the two warring sides. But since then you can see it's moved up rather sharply. In fact, as I speak today, we're currently at a new wartime high for Brent at $126 a barrel. So this is going to have an impact, as we know, on headline inflation and growth. We still think it's manageable, but it is important that these prices begin to moderate once again. Hopefully we see that in the coming weeks as further dialog comes through, but until we truly see the Strait of Hormuz opening up, there's still going to be a risk to the upside in the terms of the price of oil. Not only, of course, is the price oil high. The red line is US average gasoline prices. And this is something that's putting some pressure on President Trump to find a solution. You can see that gasoline prices... Are now also at wartime's high of around about $4.20 a gallon. So when you get a cost of living challenge at home and a mid-term election coming up in November, there is political pressure on the US President to also find a solution to this war. So far it's still elusive, but we need to hope it's coming through soon, otherwise we will have to think about reviewing our growth and inflation targets further for the year ahead. Now turning to our second point, Given what I just said about the price of oil rebounding you might be surprised to see that there has been a big rally in the equity markets. If you look at the chart I'm showing you here, this is the MSCI World Index. And you can see there has be this V-shaped recovery again since the war started in Iran. And I think the important thing here is the pace of that rally, the pace that recovery has frankly surprised us. The decline actually was only around 9%. So it wasn't even at that technical 10% correction level. This compares to around 16% following the Liberation Day tariff announcements and actually around about 11% correction back in 2023 when the world was worried about higher interest rates for longer. But you can see that investors have become again conditioned into buying this dip and once again we've seen this coming through. Now where we are a little bit more concerned is that the pace of this rally, the sharpness of this just seems to us to be a bit aggressive. Yes, some of the downside risks of a further escalation in the war has diminished somewhat. The parties are talking and there is a ceasefire, but given a higher input cost, given there's going to be a slight headwind to growth going forward, we suspect that that recovery has been a little bit too sharp. We would like to see a bit of consolidation, even a bit a pullback before the market moves forward further. So we do still think that some caution is required, even though investors seem to be in very good spirits currently. Now turning to our third point. Corporate earnings have come in very strongly, and this is one of the reasons why investors are in such good spirits. If you look at the chart that I'm showing you here, this is the S&P 500 earnings expectations – the blue line for this year and the red line for next year. About 30% of these S&Ps 500 companies are reported, including the big banks and tech companies, and the numbers are stellar – 85% of those companies are beating analyst expectations and a year on year basis earnings are up about 15 percent, so very healthy numbers, and this is one of the reasons why investors have switched their attention from the war in Iran towards the corporate reporting season. Now this makes some sense, but it's fair to say when you look at this chart, the expectations for next year, another 15 percent of their about growth is quite high. So there's quite a lot priced into the market. So far the fundamentals are good, but given the sharp rally that we've seen, given that most equity markets are already at all-time highs and given the uncertainty that still prevails around the war and commodity prices, we think some caution is still required. Yes, some of the downside has been removed, but again corporate fundamentals need to keep improving in order to justify this move higher in equities.[Music starts] So remember, as always, you can read the full report on Zurich.com and I look forward to speaking to you again very soon.[Music ends]