Valuations, Midterms, and LFC

We are halfway through the first quarter and two-thirds of the way through earnings season. The FTSE All-World Index remains within reach of its all-time highs, despite a notable rotation out of technology and growth stocks into value, Europe, and emerging markets. Leadership is shifting, but the market itself has barely flinched, which raises the obvious question: what comes next?

Valuations, measured by forward price-to-earnings ratios, sit around 10–25% above long-term averages across most markets. That leaves little margin for disappointment, yet earnings have once again surprised modestly to the upside. Companies are attempting to grow into their lofty valuations rather than relying on multiple expansion alone. It is a constructive dynamic, but not an inexpensive one.

Elsewhere, commodities have been all over the place, the dollar has remained firmer than many expected, while bond markets have been remarkably subdued. That suggests inflation fears are fading, if not entirely defeated. Recent economic data point to a cooling labour market and softer consumer spending, strengthening the case for rate cuts later this year, though not necessarily a return to easy money.

The elephant in the room is the US midterm election. As November approaches, policy becomes politics. The temptation to stimulate, subsidise or simply postpone difficult decisions will grow stronger. Markets have historically welcomed that phase. Since World War II, the S&P 500 has averaged roughly 9% in midterm years and finished higher three-quarters of the time. That’s encouraging — though unlikely to help Liverpool defend their title.