Market snapshot: US earnings optimism and UK inflation

Our head of markets has all the news and events moving share prices this morning.

Investors are currently on the front foot as the US earnings season gathers pace, with generally encouraging early signs providing some grounds for optimism.

The previous concerns of stagflation are beginning to recede as there is evidence of a resumption of the economic recovery, as corporates tread the delicate ground of wider inflationary pressures and supply chain disruptions. In addition, recent economic data, such as the retail sales figure in the US, have also prompted hopes that the current landscape is stabilising.

Even so, the season is still in its early stages and investors will not take kindly to any negative upsets. The third-quarter is up against the extremely tough comparatives of the second, where the vast majority of companies breezed through earnings expectations.

In the meantime, the main indices have regained some of the momentum which they had previously lost, with the S&P in particular edging once more towards its own record high. In the year to date, the Dow Jones is ahead by 15.8%, the S&P500 by 20.3% and the Nasdaq by 17.4%.

• Will this share take off like a rocket again?
• ii view: Citigroup aided by investment banking
• ii view: JP Morgan earnings boosted by US economic growth
• Want to buy and sell international shares? It’s easy to do. Here’s how

In the UK, the inflation reading of 3.1% for September was marginally below the estimate of 3.2%, as the previous “Eat Out to Help Out” comparisons fell away. The reading under the bonnet suggests that raw materials and road freight costs continued to rise, while hospitality and wage pressures in general could also be grinding higher.

The Bank of England is painfully aware that the direction of travel for inflation is on an upward trajectory, and recent comments from the Governor have resulted in markets pricing in an imminent interest rate hike. While the scale of any such rise remains open to conjecture, the surge in energy prices and bottlenecks in supply have underlined the Bank’s expectation that inflation will peak at somewhere around 4% in the not too distant future.

Third-quarter earnings are also beginning to trickle through in the UK, with Barclays (LSE:BARC) opening the banking season tomorrow. Investors will similarly be scrutinising the numbers for any signs of factors which could undermine profits, such as cost inflation, labour shortages and the effect of the easing of lockdowns on companies which had previously seen the benefit of a consumer switch to online, such as the retailers.

• UK bank sector Q3 results preview: Barclays, Lloyds Bank, NatWest, HSBC
• Where to invest in Q4 2021? Four experts have their say

Some weakness in the mining sector in early exchanges follows some mildly disappointing updates, although this has largely been offset by some buying of defensive shares, underlining the fragility of sentiment as investors seek safety until persuaded otherwise.

More broadly, the markets remain compelling for some international investors on valuation grounds, with the recent spate of M&A activity underlining the UK’s appeal as an investment destination. With the FTSE100 now ahead by 11.6% and the FTSE250 by 12.5% in the year to date, further activity could follow given any additional tailwinds arising from signs of recovering economic growth across the board.