Positive tone for markets, after a record-breaking week

• Global stocks reached record highs this week
• Stock price performance after US earnings reports have been underwhelming
• Trump health concerns keep tariff rhetoric at bay, for now
• Pound looks at risk from bond yields
• UK stocks moved by global factors, not UK domestic economy
• The ‘resilient US economy’ narrative to dominate

The positive tone to risk sentiment is continuing on Friday, after a week of record highs for global equities. The S&P 500 recorded another record high on Thursday and is expected to extend gains on Friday, although overall stock market gains have been slim this week. Likewise, while stronger than expected earnings reports have driven indices to record highs, the gains for individual stocks after reporting earnings have been below average. For example, Netflix delivered a better-than-expected earnings report for Q2 and posted a stronger outlook for full-year 2025 revenue, yet its share price is down more than 1% in the pre-market on Friday, usually, the average move in its share price in the 24 hours after an earnings report is more than 8%.

Why the underwhelming price action  after earnings beats?

The reason why stocks are inching into fresh record territory is perfectly reasonable: some stocks and indices look overvalued and have had a strong run already in 2025. For example, Netflix has a 12-month forward P/E ratio of more than 40, and the S&P 500’s P/E ratio is above 26 times aggregate earnings, which is the highest level since February, and is approaching the 27.7 level, which was the highest rate since 2022. When valuations get to this level, it is natural that caution sets in, and fears rise about a stock market fall or correction.

High valuations a risk for US  equities

Thus, good news for stocks and risk sentiment is tempered by concerns about excessive valuations and whether strong earnings growth in Q2 can be repeated later this year. For example, banks including Goldman Sachs, JP Morgan and Citi all reported stunning trading results for Q2 due to excessive volatility in April, that may not get replicated in Q3. The banking sector has been outperforming the overall S&P 500 so far this year, but warning signs lie ahead. Many people think that Warren Buffet is a good lead indicator for financial markets, and Berkshire Hathaway has been offloading US banks in recent months.

Many people may ask why sell stocks when they are continuing to make gains, which is a valid question. However, Berkshire Hathaway has a long-term investment strategy and so levels may have reached their take profit targets. This does not mean that banks will crash, but they may be near a peak.

As tariff risks recede, stocks reach record highs

Tariffs dominated market sentiment at the start of this week, but as the focus turns to President Trump’s health, tariff risks could recede. The EU and Canada now face the biggest hurdle to agree better terms than the 30% and 35% tariff rates applied to their exports. The August 1^st deadline is a risk event for markets, however, with the President toning down his rhetoric, markets are quick to forget tariff risks and concentrate on the positives including a resilient US economy.

The dollar is also falling on Friday, although it is the second-best performing currency in the G10 FX space this week. The dollar has had a decent month, especially vs. the yen and the pound, although it continued to post losses vs. the euro and the Swiss franc, which remains the FX market’s preferred haven, even though the SNB has implemented 0% interest rates.

The pound is at risk from bond yields once again

The pound is at risk of breaking down and is testing the zone around $1.3370, the low from late June. If it breaks this level in the coming days, then we could see steeper losses back to $1.30. The problem for the pound is bond yields, and fears of a fiscal crisis in the UK. UK bonds have been a major underperformer in the developed markets in recent days, and 2-year yields are higher by more than 10 bps this week, 10-year yields are higher by 7bps. There does not seem to be much good economic news around either. In the past week, UK GDP has contracted, unemployment is higher, and inflation rose by more than expected.

Even with this backdrop the FTSE 100 reached a record high, and the FTSE 250 reached its highest level since 2022. Why are UK stock markets recording these highs when the domestic economy is so weak? It is because they are not reliant on the UK, and they contain international companies. Even the FTSE 250 generates more than 50% of its revenue outside of the UK. Thus, the UK’s stock indices could still perform well, even as the UK economy is coming under unbearable pressure.

UK companies driven by global factors: GSK and Burberry

As an example, GlaxoSmithKline is the weakest performer on the FTSE 100 today, due to the FDA, the drug administration in the US, failing to back its blood cancer drug. The reason the FDA gave is that the company refused to test the drug at lower levels to reduce eye toxicity, and this is not a sign that the FDA is showing a preference for US drug firms over international firms.

In contrast, Burberry, the UK luxury goods firm, is the second-best performer on the FTSE 250 after it reported better than expected earnings. Although sales fell in the first quarter of their fiscal year, they eased by less than expected, which is a sign that the company’s new strategic direction could be working. For example, its store sales fell 1% in the three months to June, compared to 6% a year ago.  The company also said that it expects a continued improvement in the coming quarters.  

Overall, the focus on Friday will be on the University of Michigan consumer confidence data in the US that will be released this afternoon. The market will be looking for consumer confidence data to reinforce the ‘resilient US economy’ narrative that has taken hold of financial markets this week.