Earnings season heats up

It has been a bumpy few days for the stock market, as investors appeared to lose faith in artificial intelligence. This week is off to a stronger start, however, and a new round of company earnings could help to restore confidence.

Just days after the bull market celebrated its fourth birthday, the US stumbled last week. The Nasdaq index - which is skewed towards technology firms - fell by 4%, as investors fretted about inflation and the cost of financing AI. Asian tech companies suffered even steeper losses, with Samsung and SK Hynix down double-digits.

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Things are calmer this morning; South Korea’s Kospi index has recovered slightly, and the S&P 500 is expected to open higher. But the turbulence underlined the importance of diversification. While America struggled, the UK and Europe fared much better. The FTSE 100 is approaching 11,000 points, having crossed 10,000 for the first time in January. Dividend payments from UK companies are also at a seven-year high.

Tech turmoil offered some welcome relief to the bond market too. Since September, government bond yields have surged to levels last seen during the financial crisis. However, US Treasuries rallied late last week as investors sought out safer places to put their money. This pushed yields lower - although they remain high by recent standards.

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Results incoming

This week is all about company earnings. Wall Street banks have already got things off to a reassuring start. Investors worried the banking boom had stuttered to a halt but - once again - earnings proved resilient. Although fixed income divisions are under pressure, equity trading is still driving up profits at the likes of JP Morgan and Goldman Sachs.

More companies will enter the fray this week. Meta, which owns WhatsApp and Instagram, is likely to steal the show on Wednesday. Its results follow last week's launch of Muse, a personal AI assistant that has taken the world by storm. But investors will focus on a familiar question: will the vast sums being poured into AI ultimately pay off?

Elsewhere, look out for clues about the financial health of consumers. American Express, Procter & Gamble and Netflix are all due to report this week, shedding light on spending habits on both sides of the Atlantic.

Budget countdown

In the UK, investors are counting down to next Wednesday’s Autumn Budget. The rumour mill has been surprisingly quiet so far, but banking has entered the spotlight. There is speculation that the government could impose higher taxes on banks, perhaps reversing cuts to the surcharge they pay on corporation tax. This has sent shares in the likes of NatWest and Lloyds slightly lower.

Chancellor John Healey will be hoping for good news this Wednesday, when September’s UK inflation data is released. Inflation is expected to rise from 3.1% in August to 3.4%, with worse potentially to come. The Bank of England thinks inflation will exceed 4% early next year.

State pensioners will be watching closely too, as September's inflation figure could determine next April's State Pension increase under the Triple Lock. Barring a surprise, though, the increase looks set to be 3.9%, reflecting average earnings growth between May and July.

For now, inflationary pressures are largely concentrated in energy prices. But the Bank of England is worried about knock-on effects on other prices and wages. These concerns will come to the fore in early November, when the central bank will decide whether to raise the base rate from its current level of 3.75%.

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