First, the earnings season is going well, much better than the already strong expectations. In the US, with 88% of S&P 500 companies having already reported their Q2 results, the numbers are pointing to an earnings growth rate of 50.4%. If 50.4% is the actual growth rate, it will mark the highest earnings growth reported by the index since Q2 2021 (91.6%), says FactSet.

The revenue growth is very strong too: 15% - the highest since the Q4 of 2021. The energy sector is the biggest winner of Q2, thanks to soaring energy prices due to the Middle East war, with revenue growth of 42.5%, followed by technology companies with nearly 36% revenue growth – chipmakers outperforming with 77% growth.

Interestingly, though, the blockbuster results from chipmakers around the world have mostly failed to impress investors. We saw the same pattern of better-than-expected earnings leading to notable market selloffs among Korean and US chipmakers, the latest example being AMD’s roughly 7% post-earnings drop.

This morning, the Korean Kospi index opens the week with little enthusiasm. The index is trading flat – well in contrast with the 5–10% intraday moves of the past months, as the June–July selloff cleared speculative positions, leaving many investors bruised. But volatility is also coming down.

Elsewhere, investors were in a better mood. SpaceX, for example, announced a smaller-than-expected loss last week and was rewarded with a roughly 23% jump, while also easily absorbing the additional supply that hit the market at the end of its first lockup period. Palantir soared almost 40% after beating earnings forecasts last week, and the latter also improved sentiment across Big Tech, which had been battling uneasy questions regarding their quickly evaporating free cash flow levels.

Big Tech’s cash worries evaporate?!

Funnily enough, on that matter, I left for my summer break about two weeks ago, with investors so worried about Alphabet’s free cash flow turning negative that they barely reacted to its 82% cloud growth. Amazon and Meta also printed sharp declines in their own free cash flow levels due to massive AI spending. Meta’s free cash flow was barely positive, while Amazon’s turned negative on a trailing 12-month basis. The fastest cloud growth in 18 quarters helped Amazon’s stock price, but overall, questions were floating in the air.

As I return to my desk today, volatility remains high, but investors are warming up to the idea that the extra AI investment will increasingly rely on debt, and that if cloud revenues can justify the heavy spending, they will be there to give it a shot. This is what last week’s jumbo bond sale from Alphabet suggested. Demand was strong – around four times oversubscribed – a sign that the earnings season hasn’t been that bad after all.

In Europe, the Q2 earnings season has also been surprisingly strong. STOXX 600 companies are now expected to deliver around 22% earnings growth, the strongest pace since 2022 and well above the roughly 14.5% expected at the start of the season.

Here as well, energy is doing much of the heavy lifting, thanks to the surge in oil and gas prices following the Middle East war, but the improvement has broadened beyond the sector despite the energy crisis: earnings growth excluding energy is now expected at around 12%, roughly double the 5.5% expected before the season kicked off.

Europe therefore still trails the spectacular 50% earnings growth seen in the US, but the direction of travel has been clearly positive, with companies comfortably beating the relatively cautious expectations they entered the season with. Of course, some specific sectors, such as airlines, are feeling the pinch.

As such, the major US and European indices are preparing to kick off the new week near record-high levels, and there is not much to dampen the mood – except for upward pressure on oil prices. US crude may test the $80pb level amid the Middle East mess – the US saying that a deal is close, Iran not even willing to meet directly – but looking at corporate earnings, neither that crisis, nor tariffs nor overshooting chip prices have derailed companies from doing good business.

Contrasting macro data

In contrast, however, the macroeconomic data are telling a completely different story – different being not necessarily negative for the markets. Friday’s jobs report showed that the US economy – despite the 50% earnings growth from S&P 500 companies – shed 23k jobs in July, versus 85k job additions pencilled in, while wages grew 3.2% over the year, slower than the 3.5% expected by analysts. Bad news for people, but good news for asset prices.

People who lose their jobs and those who see their wages grow more slowly will be tempted to spend less. The latter would tame inflationary pressures and help the Federal Reserve (Fed) keep rates unchanged for longer. Lower rates than otherwise expected, on the other hand, make borrowing cheaper and also support valuations thanks to a softer discount rate. That’s especially true today for Big Tech, where valuations rely on future revenue prospects and increasingly on debt.

So this week, attention shifts to the US CPI update – both headline and core figures may have eased further in July, though both remain persistently above the Fed’s 2% target. As usual, the reasoning is that a stronger-than-expected inflation report will increase expectations of higher Fed rates and could send yields higher and equities lower. A softer-than-expected figure, on the other hand, would soothe hawkish Fed expectations and keep the market mood in a sweet spot.

Fed funds futures now assess no more than a 45% chance of a September rate hike, down from above 60% before last week’s soft jobs report. The US 2-year yield is easing from its July peak and the US dollar is being pressured lower by building dovish Fed expectations – with the Fed doves also bolstered by increasing questions regarding Kevin Warsh’s REAL stance on Fed policy – a discussion for another time!

The softer US dollar – and rising questions regarding Kevin Warsh’s real policy intentions – is helping gold recover. The $4’000 level acted as solid support, suggesting that the market will turn constructive if upward pressure on yields remains contained.

In FX, the softer dollar is helping major pairs recover from recent weakness. The EURUSD is testing the top of the YTD descending channel, while the USDJPY is regaining some of its post-intervention losses.

Speaking of that joint US/Japan action to save the yen last week: as in previous episodes of direct FX intervention, the benefits will last only so long if policy rates don’t get adjusted. Markets now assess around a 70% chance of a September Bank of Japan (BoJ) hike. It’s not yet enough to stop the yen from bleeding.