“The past is a foreign country; they do things differently there.” L.P Hartley, The Go-Between (1953)
There was a time when prime ministers served a full parliament and White House press secretaries lasted more than a week. It feels like we now get a year’s worth of news every month! The relentless, dizzying and gloom-laden news flow makes current buoyancy on stock markets look out of kilter; it was ever thus.
The longer the time horizon, the more you see a very close correlation between company profits and underlying share prices. That is the simple truth about investing: find businesses that can increase revenues and profits, reliably, for as long as possible. Applying these principles with a 5-year time horizon does iron out the majority of market meltdowns and sell-offs.
A crucial caveat is that in the short term these principles do not apply. It is human nature to overreact to awful events unfolding on TV and in newspapers. Many such events have no impact on company profits and with the benefit of hindsight should have been ignored. But headlines and human emotions are a combustible mix and create volatility that isn’t necessarily an accurate reflection of company fundamentals and prospects.
With the preceding comments in mind, I think it helpful to examine where we are on company profit growth, particularly in America. Over the last year, US company profits have risen faster than share prices. The market has got cheaper. In the year ahead it is likely that US company profits will rise by an extraordinary 30%. This puts a lot of upward pressure on share prices and I think explains the resilience of markets in the face of the Iran crisis, inflation concerns, rising interest rates and Trump antics, to name just a few worries.
In my view the most important determinant of progress - rising company profits, is very much in place. But short-term volatility and occasional panics are the price to capture long-term gains. The real risk is not investing. An inflation rate of just 3% will turn the real purchasing power of £1m, over 20 years, into £554,000.
This wouldn’t be a quarterly update without mentioning AI. This really does feel like the most disruptive force I have seen in my career. Last month OpenAI solved the Navier-Stokes problem; one of the hardest maths problems that exists. After a century of struggle it took OpenAI 88 hours. Then, on 6th October, OpenAI appeared to have solved 372 other longstanding maths problems. Perhaps the most consequential day in the history of this discipline. The worry is that humans are not in the loop. No one fully understands how the answers were achieved. Humans are not keeping up! Close behind, we are likely to see breakthroughs in physics and biology.
Turning to the AI consumer, the era of Agentic AI has arrived. These are autonomous agents that can undertake everyday tasks at home or in the workplace. Examples in the workplace include HR admin, supply chain management and cybersecurity. At home I would cite agents who will book travel, theatre tickets, restaurants, etc, all while having an intimate knowledge of your preferences. Other examples include shopping, diary management, paying bills and dealing with call centres and life admin.
An interesting real-world example is using AI to challenge parking fines. You effectively have the finest legal minds at your disposal to write legal challenges which are sinking local council inboxes!
The AI story is moving quickly. Many companies are moving too slowly and will be vulnerable to new disrupters with 0% market share and lots of ambition. The bifurcation of winners and losers in the next few years is likely to be brutal.
However, AI is not all encompassing. When assessing its impact it is necessary to weigh the human condition and in particular traits such as personality, trust and communication. I don’t subscribe to fears about a dystopian brave new world and instead see the possibility of better healthcare, education and well-being if this breathtaking technology is harnessed and nurtured responsibly.
Turning to politics, I am hoping for a dull Budget with at least some aspiration to avoid tax rises. This ever-present threat has damaged business confidence in recent years. The most interesting recent development is Labour moving leftward and opening a gap in the middle where elections are easier to win. Kemi has responded and has toned down her wooing of the far right. With 6 parties likely to gain at least 5% share at the next election, it seems a coalition is likely in the next government. I think they could all learn from Mark Carney’s performance in Canada.
The midterm election in the US on 3rd November will not stop Trump’s erratic and unhinged behaviour but on the assumption of losses, I wonder whether his cult-like status might start to ebb. Eyes will turn to who next and the election year of 2028.
To conclude, I think it important to acknowledge that occasional bad years are a certainty when investing but, over the longer term, the US stock market has risen in 7-8 out of every 10 years. (The UK number is 7 out of 10). It pays to be an optimist, as extolled by Eric Idle in the Life of Bryan.
The value of securities and the income from them can fall as well as rise. Past performance should not be seen as an indicator of future returns. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
