By Angelo Meda, Head of Equities at Banor
The inertia supporting markets
Isaac Newton was one of the greatest scientists in history, and the theories that bear his name are still fundamental to the study of mathematics, physics, and astronomy. One of the most important is the first law of dynamics, according to which a body maintains its state of rest (still) or uniform rectilinear motion (constant velocity in a straight line) as long as the net external force acting upon it is zero.
Inertia, therefore, is an object’s resistance to changing its state. In a theoretical physical model, acceleration (or deceleration) is zero and the body travels equal distances in equal intervals of time, with no friction or external forces altering its motion.
When looking at equity markets, one is reminded of this uniform rectilinear motion: stock indices are reaching new highs and, despite ups and downs, volatility appears to be diminishing, leaving what looks like a straight upward line.
Can we therefore say that markets are destined to rise steadily and that every pullback represents a buying opportunity?
So far this has been the case—but for one reason only: earnings growth has been much stronger than geopolitics. The introduction of tariffs about a year ago, the Russia–Ukraine war, developments in Venezuela, and tensions involving Iran have not materially affected corporate performance, which has been more resilient and consistent than expected. Looking back twelve months, no one would have bet on double‑digit earnings growth accelerating despite macroeconomic uncertainty, global fragmentation, and geopolitical conflicts that are likely to persist.
However, we are in a historical phase marked by very high concentration. While it is true that the US equity index, the S&P 500, is at all‑time highs, only thirteen of its 500 constituent companies are at record levels. The rest are on average 12% below their peaks and are mainly “old economy” companies—industrial firms or those with limited exposure to today’s dominant theme: artificial intelligence. It is estimated that 40% of US earnings growth is driven by investments in data centres, cloud infrastructure, or AI development algorithms. Including the energy required to sustain these technological advances, the figure rises well above 50%.
Looking at consumption, it appears that it has not been significantly affected by the war. Although gasoline prices in the US have risen by more than 40% since the beginning of the conflict—costing American consumers around $140 billion—the expectation is that this will be offset by a reduction in the savings rate, which was already compressed by the inflation increase of recent years.
We are therefore in an inertial world from the standpoint of market expectations: it is assumed that everything will continue as before, drawing on reserves and carrying on development based on a model that combines consumption and investment. The latter appears increasingly concentrated in the technology sector, with the difference that in the past Big Tech companies were characterised by strong cash generation thanks to capital‑light business models.
In Europe, we are drawing on reserves as well—not private savings, which remain high and defensive, but public debt. We can expect deficits to increase over the coming years across most European countries, driven by initiatives to contain rising energy costs, policies aimed at energy sovereignty (possibly involving a renewed focus on renewables), and defence spending, which is expected to rise for at least a decade after having declined since the end of the Cold War. Once again, a state of inertia emerges that favours more traditional sectors such as banks and energy, while leaving consumption‑ and investment‑related stocks somewhat in limbo, as they do not benefit from the same dynamics as in the United States.
A sense of inertia is also perceptible in the Chinese economy. On the one hand, the communication strategy of the Beijing government tends to suppress acknowledgment of problems; on the other, companies financed and coordinated by local and provincial governments are quietly working to build a technological and industrial system alternative to the American one, based on investment and the development of local expertise.
This state of inertia has not been disrupted by geopolitics or by tensions between governments. Companies have continued to pursue their development paths and investment policies. As long as these do not change, there will be no forces capable of significantly altering the trajectory of the markets. For this reason, the investment policies of technology giants must be monitored ever more closely: if and when capital expenditure slows, one of the most important levers that has supported market gains will disappear.
If no additional catalyst emerges, inertia will come to an end and we will face more uncertain times. Until then, we continue to move along this uniform straight line.
This communication is issued by Banor Capital Limited which is authorised and regulated by the Financial Conduct Authority (FRN: 523080). For Professional Clients and Eligible Counterparties only. Not for Retail clients. The content is for information purposes only and does not constitute investment advice, a recommendation, or an offer/solicitation to buy or sell any investment. Views are those of the speaker and may change. Any views expressed regarding future market conditions, sector performance, or investment returns are forward-looking statements and may not materialise. Actual outcomes may differ materially. Forecasts are not a reliable indicator of future performance. This communication is not directed to any person in any jurisdiction where doing so would be unlawful; distribution may be restricted.