This week in the markets - are investors too complacent?

Markets have hit something of a summer lull. Despite plenty of potentially market moving news on the horizon - from earnings season to tariffs and paying for the Big Beautiful tax bill - stock and bond markets are calm. And the glass is half full. The big question is whether investors are taking too much for granted.

It’s hard to fight the market’s momentum. The trend remains up, and shares are hitting new highs. And it’s not just a US story, although the big American tech stocks have picked up the leadership baton again. Stock markets around the world are on a roll. It’s a global bull market now.

There are reasons to be positive. First, company earnings are still growing. Expectations were reined in during the spring after the first tariff shock in April. That means there’s scope for the upcoming results season to surprise on the upside as usual. The expectation is that profits growth will be close to the long-run average of about 7% a year. That will help underpin markets at their new highs.

Other positives include only moderate sentiment. Investors are not really getting carried away with optimism. There’s still a lot of money sitting on the sidelines in cash and money market funds. That augurs well for a continuing bull market too.

Meanwhile bonds are playing along. The yield on longer-dated bonds has risen but seems to have stabilised in the 4-5% range. Much higher than that and shares will start to look uncompetitive with the income offered by bonds. But interest rates look steady and the term premium - the extra income investors require for the inflation and policy risks of holding bonds - has already moved back into positive territory so might not need to go much higher.

And with valuations in much of the world far from stretched, investors have plenty of options. Markets in the UK, Europe and Japan, let alone China, look relatively cheap both against their own history and notably versus the US.

That’s the good news. The bad news is that markets may be complacent. The first worry is valuations in the US. The world’s biggest equity market is now priced for perfection, with shares valued at a historically high multiple of earnings, cashflow, assets - however you choose to measure it.

The second area of potential complacency is inflation. The market has taken the big fiscal expansion promised by the One Big Beautiful Bill as a positive. But it carries risks as well. So far, forward-looking inflation measures have traded in a nice tight range. But if inflation does pick up again, that could change.

Where this might start to show up is in commodity markets, where there is more action than in bonds and equities this week.

The copper price has surged after Donald Trump’s announcement last week that he would double the tariff on the metal to 50% from the start of August. That has not only raised the price of the metal but also seen a big price gap open up between copper traded in the US and in London. Higher prices in America have seen huge quantities of the metal being shipped across the Atlantic to benefit from the arbitrage.

Another commodity that’s soared on tariff concerns is coffee, also in response to a 50% tariff, this time on Brazil, the world’s biggest producer. The price of robusta coffee futures in London hit a record high of nearly $5,700 a tonne earlier this year, up from a historical average of about $1,700 and the higher-grade arabica beans have risen by 70% over the past year.

The most important commodity, oil, has also been in the spotlight but here the direction of travel looks to be in the opposite direction. That’s because the International Energy Agency this week said that it expects oil demand to grow at its slowest pace since 2009 (other than during the pandemic). With some producers looking to increase supply, traders expect a surplus to weigh on the price in the second half of the year. Currently $68 a barrel, oil could fall below $60 by the year end.

Tariffs are potentially inflationary, too, but here investors seem remarkably relaxed. The belief that there really is a Trump put, that the White House will always back down in the face of market uncertainty, has become entrenched. So, the fact that a new tariff ‘deadline’ of August 1 looms on the horizon seems to faze no-one. Maybe that’s right but the reality is that there are many more barriers to trade than there were at the start of the year and that doesn’t look likely to change.

The big investment banks like Goldman Sachs have weighed all this up and concluded that net-net everything is going to be fine. They have raised their forecasts for the S&P 500 to 6,600 in six months and 6,900 in a year’s time. That would represent a slow down from the strong market growth in 2023 and 2024 but still another good year for investors.

Investor concerns are not showing up in the bond or equity markets, then. But other assets tell a slightly different story. Gold and bitcoin are both at or close to all-time highs and the dollar has fallen sharply so far this year. All of those reflect concerns about the sustainability of global debts, and in particular those in the US.

The key question is whether all the fiscal expansion, starting with Covid spending and now the Big Beautiful tax cuts, can deliver strong growth in the economy. If nominal GDP grows faster than the cost of funding the new debt (the benchmark for which is the 10-year Treasury yield) then all will be well. The economy can grow into the higher debt figure. If it cannot, then investors will demand an ever higher premium to compensate them for rising risks and an unsustainable debt spiral could ensue.

If that were to happen the only way of keeping things on track would be for the Fed to step in and hold down the nominal level of interest rates in a re-run of the quantitative easing that boosted markets after the financial crisis. Were that to happen, the dollar would likely fall further and US assets would lose even more of their supremacy premium.

But all of that is in the future. In the shorter term, all eyes will be on earnings in the US and the Mansion House speech here in the UK.

The big US banks will as usual kick things off this week with results from BNY Mellon, Citi, JP Morgan and Blackrock on Tuesday, followed by Bank of America, Morgan Stanley and Goldman Sachs on Wednesday. Results are expected to be strong, helped by that weaker dollar.

From there, the earnings reports will flow unchecked for the next four weeks or so, providing the first guidance as to the impact of tariffs, or at least the impact of the fear of them on both businesses and consumers.

On the economic front, we’ve got inflation data for June in the US and GDP data out of China. A growth figure in excess of 5% is expected on higher exports as businesses looked to get ahead of the tariff threat.

Here in the UK, the focus remains on a struggling government, just a year into its five-year term. The Chancellor Rachel Reeves has been under the spotlight after a series of embarrassing climb-downs on tax and spending. She will look to steady the ship with her Mansion House speech to City grandees on Tuesday.

She is expected to set out a vision for Britain’s financial services industry that’s based on sound public finances and a revamped regulatory system that’s more focused on promoting growth than just eliminating risk.

She is looking to remove unnecessary red tape and to slash rules that make the UK uncompetitive.

The one thing she definitiely won’t do is tinker with the much-loved cash ISA. A co-ordinated backlash has done for plans to cut the annual contribution allowance to try and divert money from idle cash accounts to more productive stock market investments. That will be a battle for another day.