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“Stellar results from Microsoft and Meta have fired up investors, quickly shifting the focus from US interest rates potentially staying higher for longer, to an environment where big tech is ruling the roost again,” says Russ Mould, Investment Director at AJ Bell.
“The probability of a US rate cut in September has fallen since the Fed’s rate decision on Wednesday with the market now pricing in a 57% chance of rates staying level versus 35% a day ago. Normally, such a shift would be negative for investors who typically prefer rates to be trending lower. However, the big tech reporting season has got everyone excited about mega profits and tremendous earnings growth.
“This positivity has extended across Europe where all the major indices moved higher. This includes the FTSE 100 which was helped by a positive reaction to Shell’s second quarter update. While profits fell, the decline wasn’t as bad as expected. Also pleasing investors was news of yet another share buyback. Shell has now declared buybacks worth $3 billion or more for 15 quarters in a row.”
Unilever
“It’s ironic that the one area of Unilever doing best is the part that’s about to be jettisoned. The ice cream arm delivered the strongest growth in both sales and volumes in the second quarter.
“That could help to drive investor interest in The Magnum Ice Cream Company which becomes its own listed entity in November.
“Unilever originally chose to demerge the business on the grounds that margins were declining, it was more seasonal and required a different supply chain to its other products. Ice cream just didn’t fit with the vision of Unilever in the future.
“Personal care was the big worry spot in the second quarter with minimal volume growth. Unilever has discovered that it doesn’t have pricing power across the business.
“Like many companies, Unilever has had to put up prices to offset an increase in raw material costs but shoppers have been reluctant to keep buying certain brands.
“The world’s best-selling germ protection soap Lifebuoy is one example. While the brand is well known, shoppers have been turned off by higher prices and that’s left Unilever nursing its wounds.”
Next
“Next is an enigma in the retail sector. It rarely has a viral moment where everyone is talking about its clothes, it isn’t competitive on price, and it still has a large high street estate in a world where so many people prefer to shop online. Despite these factors, Next has form in constantly upgrading earnings forecasts, and it’s done it once again.
“Sunny weather will have got people out of the house and onto the high street, helping to drive footfall to Next’s physical stores. It has also benefited from Marks & Spencer’s supply chain problems caused by a cyberattack. Next is often the first place of call for someone who can’t find good quality clothing basics in M&S, and Next has happily served customers who experienced empty shelves at its rival.
“Importantly for Next, it is managing to shift more products at full price. The retail sector is awash with discounts as companies cut prices to shift goods. That’s bad for profit margins and puts shoppers in the mindset that they expect discounts to become permanent. The more Next can resist discounting beyond its legendary Boxing Day sale, the more it can protect margins.”
Rolls-Royce
“Rolls-Royce has solid engines in more ways than one. Not only is it keeping planes safely in the sky, but the business is also an engine to drive growth year after year. Having already delivered a stellar turnaround, Rolls-Royce is showing no signs of taking its foot off the pedal.
“Shareholders are absolutely delighted as upgraded earnings guidance helps to rev the share price even higher. Rolls-Royce’s share price has now increased by 1,442% since October 2022, meaning investors who held that entire time have made more than 15 times their money.
“Rolls-Royce is the poster child for what’s capable on the stock market. While chancellor Rachel Reeves is keen for more people to invest and make a better return than cash, even she wouldn’t expect investors to always make Rolls-Royce kind of returns. But the gains from holding Rolls-Royce show that big returns aren’t simply a fantasy on the UK market. It’s also a welcome reminder that Britain has plenty of business champions, with Rolls-Royce the cream of the crop.”
Russ Mould: Investment Director
Russ Mould is AJ Bell's Investment Director. He has a Master's degree in Modern History from the University of Oxford and more than 30 years' experience of the capital markets.
He started out at Scottish...
