Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

BULL markets climb a wall of worry. Shares can keep rising, even when there is plenty to be concerned about. It just requires that investors decide the glass is half full - something they seem more determined than ever to do, eight months into the current market rally.

The retreat of US inflation

The latest tailwind for Wall Street was provided by better-than-expected US inflation data, with the headline rate of price rises falling to just 3% in June. Inflation has come down quickly in America and that has led investors to believe that the vicious interest rate tightening cycle over the past 15 months is finally coming to a close.

That in turn is allowing investors to dare to believe that a soft economic landing might be a realistic possibility. And that, finally, could lead to a bottoming out of earnings expectations. Put all of this together, and the increase in the market’s valuation multiple since the low point last October looks justified. Glass half full.

Last autumn, investors were prepared to pay just 15 times expected earnings for a share of the US market. Today that same multiple is 20. But if the good news story has firm foundations, then history suggests it could rise further to, say, 22 times earnings. On the basis of forecast earnings in 2024 of $240 on average, that implies a new peak for the S&P 500 of 5,300.

The fly in the ointment is the still non-trivial chance that the US economy falls into recession later this year or in 2024. There is always a lag between rate hikes and the knock-on economic impact. And the signals from the bond market are still pointing to a sharp economic slowdown. This is the wall of worry that this bull market continues to scale.

And elsewhere?

Not everyone is as relaxed as the US investor. Over in China, this week’s disappointing gross domestic product (GDP) growth data - up just 0.8% in the second quarter - built on last week’s consumer price index (CPI) report that verged on deflation. China has struggled to emerge from its Covid lockdowns with anything like the vigour it needs to deliver the 5% annual growth that Beijing has targeted. Retail sales are slowing, the property market is in the doldrums and youth unemployment is worryingly high.

Meanwhile here in the UK, all eyes will this week be on our biggest economic problem - inflation. Wednesday’s unveiling of the latest CPI number is forecast to show only a modest improvement from 8.7% to 8.2%. That’s still four times higher than the Bank of England’s target and it makes another half point hike in rates a near certainty in August. The UK’s housing market is really starting to feel the strain.

Results season

But once again, investors have something even more tangible to focus on. Economic data and interest rates may influence the market in the short-term, but in the long run it’s the profits companies generate that determine the level of the market. And this week the latest quarterly earnings season gets into full swing.

The glass half full view of earnings is that, once again, they will emerge better than expected. And the real hope is that the second quarter was as bad as it gets. What the recent market rally is telling us is that it can only get better from here. A wall of worry indeed.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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Ed Monk

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