It’s Groundhog day again. Concerns are rising about relations with Iran, and we’re preparing for another UK budget with potential to impact the banking sector as the chancellor seeks to plug a budget shortfall. Predicting what will happen next in politics is fraught with danger, so perhaps it is better to stick to the facts until after the event.
On which note, it is worth repeating how strong earnings momentum is in the market. Since the Iran war kicked off in February, we have had two sets of corporate results, the first quarter numbers of the spring, and half year results from July and August. The percentage of US companies beating forecasts in those results seasons was 85% and 86%. Forecasts for this year’s earnings have therefore risen by 17.6% on where they were pre-war. That’s quite an extraordinary rise.
A year ago it was Rachel Reeves holding the battered red briefcase, but the same rumours swirled around. Will there be an extension to the banking levy? What about capital gains tax? Of course I don’t know what will happen. But I can tell you that in the last year, expectations for UK profitability in 2026 have risen by 12% as UK companies have delivered good results.
By 2028, UK earnings per share are expected to be a whopping 42% above where they were in 2025. In the US, the rate of expected progress is, extraordinarily, around double that. These levels of corporate growth are just not normal, yet both markets trade on what appear to be relatively normal valuations. The US trades on 19.1 times expected earnings, and the UK is on a ratio of 12.1 – each is around half a turn below its 10 year average.
Outstanding growth at a below normal valuation point is clearly attractive. We’ve also seen inflation settle, consumer confidence rise and PMI indices are above par in most major geographies.
That all begs the question as to why markets are not higher. Last time I penned this piece, I identified the elevated yields in the bond market as the handbrake. The maths of it all means a higher government rate makes markets more difficult, and predicting the yield’s direction of travel is tough. What I didn’t say last time is that a yield of around 5% at least presents an opportunity to invest in government backed debt with returns to maturity not that far off twice the anticipated inflation rate over a 5 or 10 year period. That will be a useful starting point for many investors.
However, there is another reason equity markets haven’t kicked on. It’s that while we’re all very excited about the future, we’re not quite sure how to manifest that. Let me explain.
It wasn’t that long ago that markets were very positive about the prospect of extra AI capex, and raising estimates for spending was a positive catalyst for share prices. Meta did just that last week, but the result was not a bump in the share price. Instead, the questions around the certainty (or lack thereof) about the payoff from all this investment, and increasingly the financing terms attached to it, have started to dominate the debate. At the same time, the AI disruption bucket has recovered somewhat, and there have been some strong results early in this reporting period. Many remain down on previous highs on the lingering concern that big tech is building the tools to dismantle their businesses.
The purpose of raising this point is to not to nail my colours to the mast and predict whether the disruptor or disrupted will win out. Instead I’m trying to illustrate that when a big systemic change occurs, it brings an uncertainty premium. Times were simpler when tech was all about social media and advertisements, and intellectual property businesses had deep moats around them. Businesses were easier to model, and less uncertain.
We will likely not know what the big, brave future looks like or who the winners and losers will be for some time yet. The existence of known unknowns, and the prospect for unknown unknowns to spring up, creates uncertainty. Over time, the fog will lift, but in the interim period, I believe it is best to avoid hype and hyperbole and go with the highest quality businesses in a wide range of sectors. Some will be hunters looking to expand their addressable markets with new technology. Others will be seeking to prove they can defend their position and robustly grow. With corporate momentum strong at present, we feel all have the potential to add value to portfolios, and the benefit of diversification in the time ahead could be more valuable than ever.
George Salmon – Senior Investment Analyst
FPC26792
Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk) with its registered office at Sterling Court, 17 Dix’s Field, Exeter, Devon EX1 1QA. This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The editorial content is the personal opinion of George Salmon, Senior Investment Analyst. Other opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. Currency exchange rates may affect the value of investments.
