July in positive territory: global equity markets supported by earnings season and volatility
In July, the main global equity indices recorded mostly positive performances: FTSE MIB increased by 2.7 percent, Stoxx Europe 600 by 1.7 percent, S and P 600 by 3.0 percent, and Nasdaq by 3.7 percent, all in local currency and total return terms.
The market is currently at the early stage of the reporting season, which is the period during which listed companies release their financial results for the second quarter (and thus the first half of the year) and provide guidance on expected business performance for the second half. At this stage, companies typically confirm or revise their full-year guidance and begin to outline their outlook for the coming years.
A certain degree of volatility is currently being observed, accompanied by temporary weakness in earnings, particularly within more cyclical sectors such as industrials, chemicals, and semiconductors. In these sectors, final demand is often difficult to monitor in real time, as it is filtered through multiple levels of distributors. These intermediaries adjust their orders not only based on end-customer demand but also according to their inventory levels. This mechanism introduces a lag of several months in assessing the true strength of final demand.
The luxury sector continues to face pressure, with results that remain subdued. Companies in this segment have reported a trend of “spending repatriation”: compared to the summer of two thousand twenty-four, there has been a marked decline in spending on luxury goods by tourists abroad, with a growing preference for purchases made in domestic markets. This phenomenon may be attributed to the sharp currency fluctuations recorded in recent months. In addition, operating leverage represents another challenge: in a context of slowing revenues, a higher proportion of fixed costs (such as store leases and employee salaries) relative to variable costs may undermine the sustainability of corporate profit margins. While the sector is currently trading at attractive valuation levels, it remains essential, in order to regain a constructive medium- to long-term view, to understand whether the persistent weakness in Chinese demand is temporary or structural in nature.
In recent weeks, mid and small cap companies have partially closed the wide performance gap versus large capitalisation companies. This recovery has been supported by a gradual improvement in key macroeconomic indicators, driven by the progressive normalisation of interest rates, which has eased the compression in equity market valuations experienced by smaller companies over the past three years. For this trend to continue beyond the short term and extend into the medium to long term, greater visibility on the resilience of the economic cycle and a reduction in current geopolitical and trade tensions will be necessary.
The team remains focused on identifying encouraging signs of trend reversal, maintaining a highly selective approach aimed at recognising companies whose market valuations have been unjustly penalised by the interest rate hiking cycle, despite the continued strength of their underlying fundamentals.
Commentary by Massimo Trabattoni, Head of Italian Equity