The now customary tug of war between the impact of the global pandemic and the positive economic development for Europe was once again evident in July 2021.
Despite countries such as the UK appearing to announce all but the end to lockdown others, such as France and Spain, became considerably more reticent as the Delta variant took a firm hold in mainland Europe. At the same time the rebound in economic activity continued apace with expectations for the second quarter’s rebound in earnings the strongest we are likely to witness in the current recovery. With overall year on year profits growth in Q2 for the STOXX 600 forecast to be greater than 100% corporates appeared to be in rude health, but, leaving the virus to one side, many other factors still tempered the market’s enthusiasm. Not least the fear that this is as good as it gets.
Q2 2020 marked the low point in terms of profits for European companies as it was the period most impacted by Covid 19 and the associated lockdowns. With such an easy comparison this year simply had to be very good if the equity market were to continue its positive trajectory. The bad news is this second derivative, profit growth, will only worsen from Q2 onwards but the absolute figure should still give cause for a positive outlook. Looming inflationary pressure still had the capability of knocking the progress off track, although the ECB’s shift in its target from “below but close to 2%” to 2% itself, was sufficiently dovish, or perhaps not hawkish enough, to warrant a rally in the region’s bonds placing some pressure on the value rally we have witnessed over the course of much of the year to date. And this is despite the European Commission further ramping up economic growth expectations from +4.3% to +4.8% for the full year 2021.