It has been another eventful few weeks for investors. Global markets have continued to demonstrate some resiliency in the face of high inflation readings, weaker economic signals, meaningful interest rate hikes, and an earnings season that has unleashed plenty of headlines. Below, we share some thoughts on recent central bank decisions and takeaways from the second quarter earnings results.

The European Central Bank recently raised its deposit rate by 0.50%, more than the 0.25% that was expected. This marked the first increase in interest rates in the region in over eleven years. The ECB also borrowed a term from the Bank of Canada by indicating that it was “frontloading” its rate hikes in hopes of not having to raise rates as much in the future. As with other jurisdictions, there may be more to come, though future decisions will be “data-dependent”. But, the European Central bank and its policy makers are undoubtedly facing a tricky situation. On the one hand, the risks facing its economy are arguably higher than they are elsewhere because of the region’s dependency on Russia for its natural gas supply. Paradoxically, this same issue is what may keep inflationary pressures elevated. Since the beginning of June, European natural gas prices have more than doubled, and sit at levels last seen when the war in Ukraine first began earlier this year. Needless to say, Europe is facing a unique conundrum.

More recently, the U.S. Federal Reserve raised rates by 0.75%, the second consecutive such increase. Equity and bond markets responded reasonably well to the decision as it was in-line with expectations. In contrast to earlier this year, there appears to be some growing comfort that policy makers in the U.S. have caught up to inflation and have a credible plan in place to combat pricing pressures. Moreover, while Fed Chairman Jerome Powell acknowledged that another “unusually large” rate increase could be appropriate when the Fed next meets in September, he also suggested the pace of rate increases could slow in the event inflationary pressures recede. Unsurprisingly, that message was well received by the markets which now believe the Fed is closer to the end of its rate hiking cycle than the beginning.

Meanwhile, the second quarter earnings season is now more than halfway complete. In absolute terms, the results have not been great, with aggregate earnings outside of the energy sector expected to have fallen year over year once the season wraps up over the next few weeks. Moreover, despite some companies offering constructive outlooks, guidance in general has been soft, with many companies acknowledging the economic headwinds. But, investor sentiment has been very weak in recent months and expectations heading into the reporting season were understandably low. Overall, it’s fair to say that the results and guidance have not necessarily been as dire as expected.

We continue to see risks to the earnings outlook through the remainder of the year given tightening financial conditions and a deteriorating economic backdrop. But, that is a rather ordinary concern that tends to come and go, just as economic and market cycles do. Our financial plans are built with this in mind. Encouragingly, we are most comforted by the decline in longer-term inflation expectations. That is a development that leaves us more reassured about the longer-term prospects of asset classes and our ability to deliver against the needs of our clients.

Should you have any questions, please feel free to reach out.