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.

The retreat of markets since July’s peak is three months old now and it is becoming harder to argue that we are in the early stages of a new bull market. Rather it looks like shares are adjusting to the reality of a period of higher-for-longer interest rates. On that front, this week looks like being key, with rate decisions from both the Fed and the Bank of England.

Resetting expectations

Having fallen by 10% from the July peak, US shares are now in correction territory. At 4104, the S&P 500 is now half-way between the post-pandemic peak at the end of 2021 (4819) and last October’s low of 3492. It’s struggling for direction.

If you strip out the impact of the so-called Magnificent Seven tech stocks, the picture looks even less exciting. An equal weighted index of leading shares has gone sideways for a couple of years now and smaller companies have been falling since they peaked in the spring of 2021.

What seems to be happening is an ongoing assessment by investors of what the right valuation is for the stock market in an environment of geo-political uncertainty, persistent inflation and higher-for-longer interest rates. The peak valuation of 29 times earnings at the end of 2021 looks way too stretched while the ratio of 16 hit last October may be a bit too low if earnings continue to grow as forecast. At 19 times forecast earnings, the market may be priced about right if, and it’s a big if, earnings hit expectations of 12% growth both next year and in 2025.

So far, the third quarter earnings season is delivering. Around 75% of the companies that have announced their numbers so far have beaten expectations despite some disappointments last week from the tech sector. This week’s notable numbers include Apple as well as both of the UK’s oil giants, BP and Shell.

Central banks in focus

A key determinant of whether earnings continue to recover from this year’s slowdown is the extent to which the aggressive monetary tightening of the past year and half has or has not yet fed into the real economy. That is a key question for the Federal Reserve and the Bank of England, both of which make interest rate decisions this week.

The most recent comments from Fed chairman Jay Powell suggest the most likely outcome is another pause this week. Rising bond yields - back at levels not seen since before the financial crisis in 2007 - are doing a lot of the heavy lifting for the central bank, slowing the economy without the need for further rate hikes. Growing interest in bonds, from both professional and retail investors, is based on hopes for an imminent peak in the monetary policy cycle that will allow them to lock in a high yield while they wait for falling rates in due course to deliver a capital gain too.

Here in the UK, the Bank of England’s challenge is arguably greater than the Fed’s. Again, a pause in rate hikes looks likely but here the fight against inflation remains a work in progress. At 6.7% the UK inflation rate remains well above the 2% target, but growth meanwhile is sluggish. The Bank said in August that it expects just 0.5% growth both this year and next and it will update that forecast on Thursday.

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. 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. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. 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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