The week to Tuesday’s close saw the new quarter get off to a strong start, with UK FTSE 100 Index gain 0.5%, the Euronext 100 Index 2.6% and the US S&P 500 Index 3.0%. Once again the US was led higher by the technology-heavy NASDAQ Composite Index, which rose 4.8%. Markets with less technology exposure fared worse, with the US S&P MidCap Index returning just 0.2%.
The continuation of the rally into the new quarter is a strong positive signal though it remains largely founded on trust that sales and profits will recover in line with expectations that are quite ambitious.
While companies are updating the markets frequently, many managements are finding it difficult to provide guidance on sales, margins or profits and financial analysts are struggling to produce meaningful estimates. While markets are less volatile day to day, individual company share prices are still prone to large moves when news is better or worse than expected.
In the short-term, pent-up demand and re-stocking the supply chain will provide a strong sales pickup, but the underlying trend rate of growth remains an unknown. Furthermore, Covid-19 has forced many companies to change their businesses in order to survive. For many this has meant raising new equity or debt and extensive restructuring. Many now have a larger capital base to service as they put Covid-19 behind them. With management and financial analysts largely in the business of extrapolating recent trends rather than actual forecasting it is no surprise confidence around estimates remains low.
Markets were aware that news from the second quarter was going to be dire for many industries and companies, particularly those whose businesses lay directly in the path of Covid-19. We will hear more of that news over the coming weeks as companies report on the quarter and put it behind them. We will also hear more positive news that reflects a return to stability and confidence in the future, even by those hard hit by the impact of Covid-19. One such sign came during the week, when Land Securities announced it will resume dividend payments later this year. We expect this to be the first of many.