Growth trumped fear, as equities rebounded
Why did markets bounce back this week?
The news flow from the Middle East did not improve (if anything, it got worse). Air defences were activated in Dubai, intercepting ballistic missiles and drones launched from Iran. Energy infrastructure remains at risk, and rhetoric on both sides continues to escalate. And yet, markets bounced. Hard.
At some point, markets stop reacting to headlines and start reacting to positioning and expectations. That may be what we are seeing now. Despite a clear escalation in geopolitical risk, equities recovered this week, with two very strong days in a row.
It does not mean the risks are gone. But for now, markets appear more focused on what could go right than what just went wrong.
How did U.S. manufacturing perform?
U.S. manufacturing data came in stronger than expected, with the ISM manufacturing index rising to its highest level since mid-2022.
As we’ve often said lately; we came into this war not during a weak U.S. economy, but a very strong one. One of the strongest in a while. That economy is still alive, even with oil prices rising and supply chains facing renewed pressure.
Under the surface, there are early signs of strain. Input costs are rising, delivery delays are increasing, and hiring is slowing. But the key point is this: activity is still growing.
Producers appear to be treating the current shock as temporary. Inventories are being built, expectations remain stable, and confidence has not collapsed. For now, manufacturing is bending, not breaking.
Are U.S. consumers still buying?
U.S. retail sales rose 0.6% month-over-month in February, beating expectations and marking the strongest increase in eight months. Core measures also came in solid, with the control group rising 0.5% (a key input into gross domestic product).
On a year-over-year basis, sales are up 3.7%. That shows a healthy consumer. Importantly, this data comes before the full impact of higher energy prices, but it still reinforces the broader point; the consumer entered this period in relatively good shape.
What can we expect from earnings season?
Looking ahead, the data continues to hold up better than expected, and market behaviour is starting to reflect that resilience.
With earnings season around the corner, the focus will shift back to fundamentals. The question now is whether corporate results can reinforce what the data is already suggesting.
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
