Derren Nathan, head of equity research at Hargreaves Lansdown, highlights a weaker start for the FTSE 100 as stalled US-Iran talks and renewed pressure on oil prices unsettle markets ahead of the US earnings season.
Derren Nathan, head of equity research, Hargreaves Lansdown:
“The FTSE 100 has followed Asian markets downwards after negotiations between the US and Iran in Pakistan ended without a deal at the weekend. A cut-and-dry path towards a resolution was perhaps too much to hope for by Sunday evening, and this may be just one of the twists and turns towards an agreement, but for now, the path beyond the current ceasefire is uncertain.
Decisive action by the US to remove Iranian mines from the Strait of Hormuz is yet to restore confidence that the key transit route will re-open, and the proposed US blockade of ships heading to or from Iranian ports later today is likely to stoke tensions further as well as curb Iranian fuel exports. That’s sent Brent crude prices towards $102 per barrel this morning after they fell to around $94 on hopes of a diplomatic breakthrough.
The deadlock is also weighing on US stock futures today as investors ponder the inflationary implications of prolonged disruption to oil and gas supplies. Markets will be paying more attention than ever to the mood music provided from first-quarter earnings and more so guidance for future periods.
Despite small downgrades since the year began, the S&P 500 is expected to deliver its sixth quarter in a row of double-digit earnings growth according to the latest Factset Earnings Insight, led by Information Technology, Materials and Financials. As is customary, financials are amongst the first to report, starting with the big US banks, which are expected to be benefitting from strong trading and dealmaking revenues. Looking to the full-year, guidance from the sector so far has been broadly upwards, but it’s technology and healthcare that have seen the greatest proportion of upgrades year-to-date, with industrials, utilities and consumer-facing businesses being the companies that have, on balance, guided downwards.
Allocating funds towards sectors with structural growth drivers and less dependence on cyclical demand is a sensible route to take. But stock selection in quality businesses with focussed strategies remains vital if investors want exposure to resilient companies that can extend their competitive advantage in even the most testing of environments. While US earnings-based valuations remain a little above the five-year average they’re less demanding than they were at the beginning of the year, and the risk-off backdrop could provide some opportunistic entry points for companies well set to prosper over the longer-term.”
