The third quarter reporting season is now well under way with most US and European companies are publishing their financial statements for Q3, 2023, and providing guidance for Q4.

The publication of quarterly financial statements by the world’s most influential companies is always an important time for the stock market as participants assess each company’s overall health.

This reporting season came about at a delicate time for the stock market following the latest geopolitical events in the Middle East and the most recent signals by major central banks that interest rates will need to stay ‘higher-for-longer’ to stem inflation.

These latest events add to the series of shocks investors have suffered over the past couple of years. After the outbreak of COVID in early 2020, which crippled global economies, Russia’s full-scale invasion of Ukraine two years later sent energy and food prices soaring, propelling worldwide inflation to their highest levels in decades. Global central banks responded with a series of unprecedented interest rate hikes in quick succession over the past 18 months.

As central banks are unlikely to proceed with interest rate cuts during the first half of 2024, there has been a renewed upturn in bond yields in recent weeks. This has important implications for all asset classes. In fact, while the US equity market performed remarkably well during the first seven months of 2023, there was a marked downturn over the past three months.

Inflation readings and statements by central bank officials will remain the most important drivers in the weeks and months ahead

The S&P 500 in the US entered into ‘correction territory’ last week after having dropped by over 10% from its high at the end of July – the largest drawdown so far in 2023. This happened when share prices of some of the larger capitalised companies in the US dropped heavily in the aftermath of their latest quarterly announcements.

One remarkable movement was that in the share price of Google parent company Alphabet, which fell by over nine per cent last Wednesday (its worst one-day decline in nearly a year and the worst daily performance since a 12% slump on March 16, 2020, at the start of the pandemic). Although the company reported a very strong improvement in its overall level of profitability, revenue from cloud services narrowly missed analyst expectations.

The performance of the S&P 500 index has become increasingly influenced by the mega-cap companies. The so-called “magnificent seven” – Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla – which account for almost 30% of the overall index, have seen their share prices jump by over 75% during the past 12 months, leading the market rally during the first seven months of 2023 as a result of their strong financial performances and enthusiasm around artificial intelligence. This helped the S&P 500 index rally by over 20% over the past 12 months.

However, in view of these seven companies’ dominance of the overall index, many market commentators calculate the S&P 500’s performance with each company having an equal weighting. Using this benchmark, the index is up by a more modest 11% during the same period.

Incidentally, following the sharp stock market sell-off for a large part of 2022, the S&P 500 index had bottomed just over a year ago on October 12, 2022. Since then, most of the large-cap stocks rallied as inflation eased from double-digit figures and as economic growth proved resilient despite the significant upturn in interest rates.

While international financial markets are currently dominated by regular announcements during the reporting season, this is not a requirement in Malta as companies listed on the MSE are only obliged to publish their financial statements semi-annually. Nonetheless, a few companies still update the market on a quarterly basis in order to keep the investing public adequately informed of ongoing developments.

Last week, APS Bank plc published their quarterly figures, followed by HSBC Bank Malta plc at the start of this week in tandem with the announcement of their parent company.

Bank of Valletta plc is due to report on their Q3 financial performance today, while Malta International Airport plc generally provides its third quarter financials by mid-November.

Meanwhile, the recent market developments in Malta were mainly centred around the heightened activity in the corporate bond market, with new offerings by AX Group plc, International Hotel Investments plc and APS Bank plc, apart from the rights issue of Lombard Bank Malta plc.

The strong demand by existing holders of the maturing bonds of AX and IHI together with the evident enthusiasm for the subordinated bonds of APS reconfirms local investors’ appetite for fixed-income securities following the unprecedented upturn in interest rates in such a short period of time.

The sheer extent of excess liquidity in the Maltese banking system is likely to continue to support new issuance activity as many investors seek to mobilise increasing amounts of idle funds into income-generating assets.

Despite geopolitical uncertainty taking centre stage in recent weeks with the terrible events unfolding across the Middle East, the main focus in financial markets that is likely to dominate future movements in most asset classes remains the interest rate environment.

The bear market in bonds is likely reaching its final stage as interest rates approach a cyclical peak. However, bond prices are only likely to begin to recover when there is ample evidence of concrete interest rates cuts materialising in the US and in Europe.

Inflation readings and statements by central bank officials will therefore remain the most important drivers in the weeks and months ahead.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd, ‘Rizzo Farrugia’, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. Rizzo Farrugia, its directors, the author of this report, other employees or Rizzo Farrugia on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither Rizzo Farrugia, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.

© 2023 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.