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Pacome Breton, Nutmeg's head of portfolio management, reviews the earnings season, the outlook for inflation, and gives an update on the Nutmeg portfolios.

We’ve just come to the end of the earnings season, where major listed companies share their results. Have there been any big surprises, or were the results in line with expectations?

In the US, which is the primary market for equities, the majority of companies have now reported their earnings for the end of 2023. The season has been notably good for US equities overall, and has surpassed expectations. 

The market thought company earnings would grow by just 1% compared to a year ago, but final earnings for large US corporations came in at over 7%, which is significantly higher. Sales also grew, rising by just under 4% compared to the same quarter last year, reflecting a positive trend overall. 

Notably, the information technology and communication services sectors demonstrated robust earnings growth, surpassing last year's figures by 25%. Sectors like consumer discretionary and utilities experienced a strong quarter as well.

Europe has not done so well. Earnings per share are down 11% compared to a year ago, 2% lower than expected. 

The stark contrast between the US, with its strong earnings growth exceeding expectations, and Europe, with negative growth and below consensus, is evident. Why is this the case?

The exceptional performance of top companies in the US – such as Microsoft, Apple, Amazon, and Nvidia, often referred to as part of the "magnificent 7" – played a significant role in driving the growth and outperformance of the US market. The results of these companies are potentially inflating what could otherwise have been a relatively flat earnings season. 

Has the outlook for inflation changed? And are interest rates cuts on the horizon?

The outlook for inflation remains unchanged globally, with the US, the UK, and Europe still experiencing a downward trend overall.

However, recent data has shown numbers higher than expected, including a temporary increase in the UK. 

In the US, while overall inflation came down to 3.1% in January, core inflation, which removes volatile food and energy prices, and is closely watched by the market, remained at 3.9%. This was higher than expected, and makes the trajectory of decline less steep than what was observed a few months ago.

The implication for central bankers is clear. They must time interest rate cuts very carefully. If inflation doesn’t come down, and the economy performs better than expected, cutting rates too soon could raise inflation again, which is the opposite of what they want to achieve. 

Consequently, in February, market expectations for rate cuts in the US and the UK were pushed back, with UK interest rate cuts now expected in August. 

While optimism for swift rate cuts has influenced recent movements in the equity market, the potential delay of these cuts could be justified by the robust performance of the economy.

Have you made any changes to the Nutmeg portfolios so far this year?

Yes, we’ve made a couple of changes to our Fully managed portfolios so far this year. 

In January, we increased our exposure to Japan, which is experiencing economic dynamism and renewed interest from investors. It is benefitting from the ongoing weakening of the yen, something which is favourable to Japanese equities. Foreign investors also see Japan as the go-to country in the region, given ongoing difficulties in China. 

As a reminder, at the end of October 2023, we significantly increased our exposure to US equities, a position which has been good for the portfolios so far this year. We’ve since made a small change here, diverting some equity exposure away from smaller European companies and towards the US, which is currently having a better start to 2024. 

The Nutmeg investor update is also available as a podcast. Listen to this month's update below. 

Google Podcast link to Nutmeg Investor Update

About this update: This update was recorded on 5th March 2024. All figures, unless otherwise stated, relate to the month of February 2024. 

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance.