Investing involves the risk that your capital goes down as well as up; you may get back less than you invested. The commentary below is not intended as a recommendation for you to personally buy or sell any of the investments mentioned nor to take any investment action whatsoever. 

What happened

Companies made a lot more money than expected: global profit growth in Q1 was about 15% versus a year ago. That level of growth is in the top 10% historically and significantly stronger than investors were expecting at the start of the year. It was driven primarily by spending on AI infrastructure.

In the context of profit growth of about 15%, it should not be terribly surprising that the global stock market increased in price by more than 12% in H1. Profit growth should beget stock price growth. In fact, global stock prices relative to their profits declined over the first half of the year. So, despite the rise in stock prices, shares are now ‘cheaper’ than they were in January.

How it affected TindleWealth portfolios

The equity components of TindleWealth’s portfolios did well in both absolute and relative terms. Most of the actively managed equity funds in which we invest outperformed the global stock market in H1 and the ones to which we allocate the most were the ones that outperformed by the greatest margin.

Additionally, the FTSE 100 underperformed global equities and so, for our UK orientated clients, our relative performance was boosted by the fact that we own virtually none of the FTSE 100.

Our clients’ non-equity exposures, e.g. bonds and hedge funds, underperformed. The return on the non-equity components of our portfolios was about 0%. That was driven partly by a moderate selloff in UK government and an underperforming hedge fund that, historically, has served our clients well and in which we continue to believe strongly.

In aggregate, this fed through to solid outperformance for all of our core strategies.

Looking Forward

The big question is whether profit growth can continue at a relatively high level. The obvious way for this to happen is for the AI infrastructure spending to continue at pace but there are also other potential positive factors including increased productivity as a result of AI adoption and a rebound in consumer spending as the re-opening of the Strait of Hormuz lowers the oil price and frees up cash to be spent elsewhere. The bear case is disappointing profit growth, the most likely catalyst for which would presumably be a slowing of spending on AI infrastructure.

The liquidity environment – which can be thought of as the amount of money available to be invested in financial assets – may also be about to get worse. Firstly, there are some indications that the Fed, under its new Chair, will effectively seek to withdraw money from the financial system (or, at least, change the plumbing of the financial system such that the impact could be the same). Less money being available may lead to a decline in demand for financial assets and therefore a drop in prices.

Secondly, a number of huge companies appear likely to seek to raise money from investors in H2 by issuing shares including Alphabet, Meta, OpenAI and Anthropic. Over the same time period, pre-IPO shareholders of SpaceX will be allowed to sell their shares on the open market. A greater supply of shares in the market, all else equal, should put downward pressure on existing share prices.

There are good reasons to remain bullish and, indeed, the most likely path over the next 6-12 months appears to be continued profit growth that drives stock prices higher. But the risk of a significant selloff appears to be increasing. If stock prices continue to climb, we will likely gradually position portfolios more defensively.