The economic growth momentum in the post-pandemic recovery has peaked, and advanced gross domestic product estimates from the US and the eurozone to be released this week will confirm a solid expansion in the second quarter.
Company earnings reports are telling a similar story. Expectations for the S&P 500 of 21% revenue growth and 71% higher earnings than in the second quarter of last year suggest that growth rates will be lower going forward, and the bar for positive surprises and earnings beats are by now very high.
The transmission of monetary policy by improving financial conditions via keeping bond yields low, risk appetite high, and corporate bond spreads narrow has also reached extremes. Mean reversion of all these drivers for financial market performance can be a powerful force in the absence of new triggers but it is not a mechanical relationship. Last week’s equity market dip, which has largely recovered, makes it clear that missing tailwinds and moving back to a more normal economic and policy backdrop is not enough to drive risk assets lower on a sustained basis
Regulatory risks in the UK increased once again, as the education technology sector has been banned from making profits, raising capital, or going public. The new regulation follows an earlier regulatory crackdown on the listing of technology companies outside the UK. The emerging regulatory risks in the UK could suggest that European companies will not benefit from the secular growth of the UK economy as much as we had originally expected.