This week in the markets: Stocks hit record highs after a strong earnings season

It’s A-Level results day on Thursday, but investors are celebrating a different set of numbers. Some of the world's biggest companies have published financial results in recent days - and markets have been pleasantly surprised.

UK, US and European stocks are all trading near record highs and, importantly, the gap between them is narrowing. For years, the US has been top of the class, but the three regions have delivered very similar returns over the past year. 

That’s because several different forces are driving stocks higher. On the one hand, artificial intelligence is booming. Investors were getting nervous, but huge profit figures have steadied their nerves. As of late July, US tech earnings were up by almost 70% year-on-year.

But it’s not just AI that’s doing well. Last week, BP reported its strongest profits since 2022, fuelled by higher oil and gas prices. The same story is playing out across the energy sector. This has boosted UK and European markets, which have plenty of exposure to ‘old economy’ industries. The banking sector has also benefited from the oil price surge, as it has pushed up interest rate expectations.

We’re now at the tail end of earnings season, but there are a couple of big hitters still to come. Nvidia reports on 26 August, while Walmart - which a good gauge of how US consumers are feeling - will report on 20 August. 

For now, the mood is upbeat. Even Berkshire Hathaway is buying equities again after a three-year selling streak. The optimism is a little unnerving though. It seems strange that current conditions - which threaten to reignite inflation - can be good for mature energy and banking giants, as well as AI firms which are laser-focused on growth.

There are a couple of key economic updates to look out for this week. On Wednesday, the US will publish inflation figures for July. Inflation in June was lower than expected at 3.5%, and analysts are expecting it to fall again to 3.4%. The data could have important implications for US interest rates - and, by extension, markets around the world. A higher-than-expected reading could result in rates staying higher for longer.

Closer to home, the UK will report GDP figures for the second quarter on Thursday. Investors were pleasantly surprised by the first-quarter figures, which showed the UK economy expanded by 0.6%. More growth would be welcome news, but there could be a sting in the tail for borrowers and investors hoping for lower rates.

One of the stranger developments of recent days has been the pick-up in precious metals. After two months of outflows, gold ETFs attracted inflows in July, and the price of gold increased by 7% last week. Gold miners such as Fresnillo and Hochschild are climbing too.

It is tricky to pin down exactly what is driving the bounce, which follows a tough few months for gold. The metal didn’t behave like a traditional safe haven during the early stages of the Middle East conflict, but the changing outlook for interest rates could be moving the dial. If the last year is anything to go by, though, investors should prepare for a bumpy ride.