Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
Investor Content Strategist
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UK and US to announce trade deal
Fed on hold, BoE to cut
FTSE’s winning run ends but ticks up as Next beats in Q1
Arm Holdings dives on earnings, Google dumped by Apple AI talk and Nvidia up on chips chatter
Big picture
Victory Day for Britain...? A UK-US trade deal is about to be announced today and we get a rate cut from the Bank of England.
Trump posted on Truth Social: “Big news conference tomorrow morning at 10:00am, the Oval Office, concerning a MAJOR TRADE DEAL WITH REPRESENTATIVES OF A BIG, AND HIGHLY RESPECTED, COUNTRY. THE FIRST OF MANY!!!”
Sterling rallied on the news but is now giving it back as it seems maybe it’s just a framework of a deal...there are so many moving parts for traders right now I don’t know if this can really be seen as risk-on or what...but it continues a more constructive tone to tariffs along with the China talks this week....gold which had been trading 20% above its 200-day moving average in big extension has pulled back a touch.
We don’t know what any terms will look like for different sectors of the economy and the devil is in the detail...but we can look at a very back-of-fag-packet maths to see which stocks might be affected by a trade deal by looking at US revenue exposure – Rolls-Royce, BAE Systems, GSK and AstraZeneca perhaps. Aston Martin, which had suspended exports to the US, is up 6% on the news.
Any trade deal is better than none right now, but it takes a long time to negotiate a full trade deal so there could be some disappointment if there is only a very broad framework and a lack of detail.
Fed says wait
The Fed left rates on hold and Jay Powell mentioned a variation of the word ‘wait’ about 24 times in the press conference, half of which was the phrase “wait and see”. The Fed also said it sees higher chance of higher inflation and higher unemployment – stagflation.
US markets ended the session higher in choppy trading. Nvidia caught some tailwinds on reports Trump could rescind some Biden-era chip restrictions. It seems the AI diffusion rule, which was set for May 15 and aimed at limiting China's access to AI chip technology, will not be enforced.
Alphabet stock plunged after it was reported that Apple was looking at integrating AI into Safari...some call it the Kodak moment for Google...I’m not so sure but this presents some fresh doubt into the bull thesis.
Arm Holdings shares plunged on soft guidance despite a beat on the top and bottom line. The UK-based chip designer said revenue this quarter will be between $1 billion and $1.1 billion, while earnings per share are seen between 30 cents and 38 cents, against the 42 cents expected by analysts.
UK
The FTSE 100 ended its monster win streak with a big down day for GSK and AstraZeneca. The blue chips ended down 38.09 points, 0.4%, at 8,559.33. Early doors on Thursday we are seeing this come back up about 0.3%.
Warm weather impact...Centrica down 6% on warmer weather and Next sales rising twice as fast as forecast... but the FTSE 100 rallied on a broad boost to sentiment from news of a potential trade deal with the US.
Next delivered a strong Q1 with £55m in extra sales compared to forecast, but largely stuck to full-year guidance as because it reckons this was a pull-forward in demand due to some warmer weather – it hasn’t lasted. Full price sales over the quarter rose by 11.4%, almost twice as fast as the 6.5% expected. It’s upped the full price sales target for the year to +6% from +5%, but stuck to total group sales of £6.6bn for the year. Group profit is now seen at £1.080bn from prior guidance of £1.066bn - a marginal increase. Next is always super cautious so it’s no surprise management is not really upgrading the forecast for the year but I would not bet against it beating the target.
Centrica shares went off the boil as it warned warmer weather would impact operating profits. British Gas Residential Energy was impacted by warmer than normal weather in the last quarter but is still expected to be within its medium-term sustainable adjusted operating profit range in 2025 of £150 million - £250 million. And Centrica stuck to its 2025 full year adjusted operating profit guidance ranges and the intention to increase the full year 2025 dividend per share to 5.5 pence.
IMI - Group organic revenue was 3% lower than the same period last year for the specialist engineering company. Adjusted revenue was 5% lower, but management stuck to full-year guidance of adjusted EPS will between 129p and 136p. Shares +4% in early trade.
Paper and packing group Mondi reported higher sales volumes and better cost control offset lower selling prices, with underlying EBITDA at €290 million. Shares rose 2.5% in early trade.
InterContinental Hotels Group shares rose as it checked in with some decent Q1 numbers and gave a positive read on Q2 bookings. While it noted that some forward economic indicators have softened, comparable on-the-books global revenue for Q2 continues to show growth.
Among the midcaps we saw strong gains for Harbour Energy and Renishaw, the latter of which would be a beneficiary if there is a UK-US trade deal.
For investors, further declines in UK interest rates should act as a tailwind to renewable energy, infrastructure, and property sectors. So we are looking at housebuilders, REITs and renewable energy ETFs...note 3i Infrastructure results today are pretty solid at +10.1% return for the year, which was ahead of target.
Bank of England Decision
While a 25bps cut is practically nailed on for today’s meeting of the Monetary Policy Committee, some have called for the Bank to more aggressively with a 50bps move. This may be a step too far, albeit there are a couple of doves who could vote this way; but investors will be closely watching signals for the pace and depth of cuts. In particular, investors sitting on cash should pay attention to whether the market thinks rates will ultimately fall to 3.5%, or much lower. As we discussed last month, there are notable mid-cap stocks sitting on 6-9% dividend yields that seem well insulated from the macro backdrop and have them well covered at present.
Heading into the meeting this week markets expected three 25bps cuts from four meetings, and for rates to end the cycle about 100bps lower, at about 3.5%.
Watch for a shift in the formal guidance – if they remove the word “gradual” from the statement that a "gradual and careful approach to removing monetary policy restraint remains appropriate", then it could be seen as a prelude to consecutive cuts.
Please note that the decision is being delayed 2 minutes to 12:02 (BST) due to the two-minute silence to mark the 80th anniversary of VE Day.
US Recap
The S&P 500 (+0.4%), Nasdaq (+0.3%), and Dow (+0.7%) gained as markets anticipated President Trump's major trade deal announcement, expected with the UK. Nvidia surged (+3.1%) on potential easing of chip restrictions, Disney spiked (+10.8%) after upbeat earnings, while Alphabet dropped sharply (-7.5%) amid Apple's AI search considerations. Futures signal continued strength Thursday morning.
Today – weekly unemployment figures + earnings from Coinbase.