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.

Markets face two problems heading into this latest earnings season. The first is that, when the market’s expectations are already so high, there’s little room for companies to beat them. Stonking earnings growth is already priced in - anything else would be a disappointment. It’s a bit like when a team you support far exceeds what you initially thought possible, yet still dashes your hopes in the end. But enough on that.

The other problem is that this is likely to be the peak for post-pandemic earnings growth. The Financial Crisis proves a useful comparison point. While shares rose sharply in the early recovery phase back then, they began to stumble once earnings growth actually turned positive. There was a 16% retreat in the summer of 2010 as investors paused for breath after a very similar V-shaped recovery to the one we have enjoyed in the past 15 months.

For much of 2021, markets have been optimistic. They’ve buoyed to the assumption that vaccines would eventually supress the virus, global economies reopen, and consumers would unleash all their pent-up demand with aplomb.

Of course, things can’t all be plain sailing for markets. There was a fear, but it was a novel one. What if things might get just a bit too good - that economies might rebound too strongly and set inflation soaring?

Very few of us thought the opposite might prove true. The fear in this case would be less about growth proving too strong, and more about growth beginning to stagnate.

It’s now the latter fear that is concerning investors and has seen UK and European stocks move broadly sideways, with a slight dip in parts, over the past month.

The situation has been worsened in recent weeks by the spread of the Delta variant, which now accounts for the majority of new cases through much of the continent. A new variant clearly threatens an improving economic outlook.

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Though the variant is yet to curb UK ministers’ preference for removing all lockdown restrictions - with Boris Johnson expected to today confirm that most remaining Covid restrictions will be lifted in England on July 19.

A survey for the Economist found that huge numbers of Britons are far from happy with Johnson’s proposed ‘Freedom Day’. Two-thirds of those polled thought masks, social distancing and travel restrictions should continue for another month, with a majority in favour of continuing them until Covid is ‘under control globally’, whenever that might be. The Netherlands set a worrying tone last week when it decided to reintroduce restrictions on social venues like nightclubs and restaurants only two weeks after lifting them.

It’s not just the Delta variant that is giving investors the jitters. We’re approaching a new part of the recovery phase, away from ‘hope’, and into the ‘growth’ phase in which better earnings are the focus.

Recent economic data suggest investors may be right to temper their expectations. Last week, US jobless claims figures rose unexpectedly, leading to fears that the economic rebound may be slowing. Those fears were reflected in the bond market - 10-year US government bond yields fell to 1.25% on Thursday, their lowest level since February. A day later, the UK posted GDP growth of 0.8% over May, still a rise but a fair bit lower than the 1.5% expected.

So, six months into the year, we find ourselves at something of a crossroads. As we move from ‘hope’ to ‘growth’, investors are bound to wonder what happens next. Fortunately, Fidelity investment director Tom Stevenson has been thinking about just that. The latest Investment Outlook will be published on Wednesday 14 July with a pre-recorded webcast which you’ll be able to find here.

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. 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 a Fidelity adviser or an authorised financial adviser of your choice.

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