Mearns & Company Monday Espresso Podcast

Monday Espresso Podcast - 18th August 2025

[00:00:00] Nathan Sweeney: Good morning everybody. It is Monday the 18th of August, so yeah, really into the kind of summer period at the moment. So today I'm joined by Rory Dowie. Rory is our portfolio manager on our personal portfolio side. So our discretionary portfolios. Rory, great to have you on the show.

[00:00:17] Rory Dowie: Good morning, Nathan.

[00:00:18] Rory Dowie: Great to be back.

[00:00:19] Nathan Sweeney: So let's start with equity markets. How did equity markets perform last week?

[00:00:23] Rory Dowie: Yep. So as we've kind of gotten used to over the last few months, equity markets had another pretty solid week, broadly up across the board, US was up around 1% and Eurozone and Japan marginally ahead of that and really what was causing that, that was on the back of some economic data, which helped to boost investor expectations that we might get a rate cut in September.

[00:00:43] Rory Dowie: And we also had comments from Scott Bessent, of course, the treasury secretary in the US, he made some comments that he believes rates are about 1.5% so high. I thought it was quite an interesting nuance actually. If you look under the surface within the US, smaller companies bounce back quite hardly on some of that [00:01:00] news, and that's because they're typically more leveraged to interest rates.

[00:01:03] Rory Dowie: Smaller companies typically have more debt, they have higher funding requirements. So if the market is now expecting a rate cut in September, that should be better for smaller companies relative to these very cash rich, large companies. So we actually saw small companies outperform last week, and then obviously the news on China as well.

[00:01:20] Rory Dowie: We got another tariff extension, another extended tariff pause for 90 days that was clearly positive too. And then finally over the weekend we obviously had the Trump and Putin talks, and that will lead into Trump and Zelensky talks. So yeah, busy, busy week across the markets.

[00:01:36] Nathan Sweeney: All eyes will be on obviously the meeting that we have today in the Oval Office, and obviously with European leaders as well, all flying into the US.

[00:01:44] Nathan Sweeney: So what's your take on Russia and the US, the conversations over the weekend and what to expect?

[00:01:50] Rory Dowie: Yeah, absolutely. I mean, from what I've read in the news and what I've been listening to on podcasts, et cetera. Really, it kind of felt quite careful. Clearly there's been no sort of concrete agreement. There hasn't been any significant progress or that is from what we've heard from both sides.

[00:02:03] Rory Dowie: But I think what was positive clearly was that we had comments from both Russia and the US and they were talking around, there's an understanding and they're on the same page with where they think the negotiations should start. And I think there's been a slight shift in the US stance. So rather than trying to find an immediate ceasefire, you know, I think Trump is now looking to pursue a full peace agreement.

[00:02:24] Rory Dowie: That probably gives Russia a little bit more time and leverage, but at the same time, hopefully is something a little bit more structural in terms of peace within the region. So I think that was obviously positive, but as I say, still early days and of course it would be very interesting to see what happens with the European talks.

[00:02:39] Nathan Sweeney: Okay, so let's move to markets and what was moving markets last week? So any data points of note at last week?

[00:02:45] Rory Dowie: Yeah. We had the producer price index data in the US so the producer price index or PPI as people call it. That's essentially the change in prices that producers receive for goods and services i.e. it's the cost of production that differs to consumer price index or CPI, which is kind of the inflation side of it, and that's the change in what consumers pay. So thinking about the cost of production, and actually interestingly, if you look at the data in July, that cost of production, the PPI in the US, that jumped 0.9% in July.

[00:03:15] Rory Dowie: And that was an acceleration from the flat reading in June, the largest monthly increase in three years. So that was a little bit concerning, particularly given tariffs, you know, were we starting to see perhaps some of those inflationary pressures creep through. You might remember last week we had the non-farm payrolls and we had kind of softer jobs data, which really boosted expectations of this rate cut coming.

[00:03:35] Rory Dowie: But, you know, with this slightly hotter PPI reading puts the Federal Reserve in that difficult position. So that was probably the main data point of note last week.

[00:03:44] Nathan Sweeney: Okay, so the cost of stuff which is made basically increasing because of
those tariffs, perhaps that leads the Fed to cut less than expected.

[00:03:53] Nathan Sweeney: So people were thinking we might get 50 basis points or a half a percentage point rate cut. Maybe that'll be a quarter of a percent or 25 basis points as they call it. But you mentioned at the beginning that you know, another positive week for equity markets and so people will be wondering, are we in some kind of market bubble?

[00:04:13] Nathan Sweeney: I wonder what your thoughts are on that.

[00:04:15] Rory Dowie: Yeah, a really good question, Nathan, and actually a lot of clients are asking that at the moment, and I think it's very, very pertinent discussion in the investment community at the moment. We did a little bit of work, we did some simple analysis to look at last time we were at these valuation levels in equity markets, and actually if you exclude the kind of one-off COVID year, we had quite high distortions in company earnings, which made the multiples move around a bit.

[00:04:38] Rory Dowie: Actually, if you were to extend back to the tech bubble in the early 2000s, if you were to take today's valuation multiple for the S&P 500, those US companies, we reached that level in October, 1998, and actually, if you look from October, 1998 to the peak of the tech bubble, the S&P 500 actually rose another 40% when we hit today's valuation level back then.

[00:05:01] Rory Dowie: So yes, we might be in a bubble today, but I think if we are in a bubble, there could be a long way still to go. I would also make the point that today's companies are much more profitable than they were back then. Profit margins have roughly doubled. Profit margin today are about 14% versus the 7 to 8% back then, so perhaps warranting a higher multiple than back in 2000.

[00:05:21] Rory Dowie: And I think it'd be important to just remember kind of the words of legendary investor Peter Lynch. It's better to be a month late cooling the top than a month early. And really the whole logic behind that is that typically in bubbles, you know, as you get that melt up towards the end of the bubble, that's where you can get quite significant price action up.

[00:05:38] Rory Dowie: So just a couple of comments there to kind of put today into context in the longer term history.

[00:05:43] Nathan Sweeney: And I think, you know, clearly we do have bull and bear markets and obviously bull markets, markets going up, bear markets, markets going down. It's a natural part of investing. But it's important to remember that, technology that we have today, artificial intelligence, we're starting to see earnings coming through as a result of this new technology.

[00:06:02] Nathan Sweeney: And generally what that means is these companies which look expensive today, can continue to grow at faster rates, which ultimately makes them less expensive in the future. So Rory, what should we be looking at for the week ahead?

[00:06:15] Rory Dowie: So yeah, in the US we have the Jackson Hole Symposium and that will dominate the week, and that will be headlined by Jerome Powell's speech on Friday.

[00:06:23] Rory Dowie: Again, maybe giving us a bit of an idea on what the Fed is thinking around rate cuts and inflation. So be watching that very, very closely. We also have inflation data in the UK and some other economic data points in Europe, so we'll be keeping an eye on that as a team and we'll give you an update next week.

[00:06:39] Nathan Sweeney: Perfect. Hopefully you found today's update useful. If you have any questions at all, just ping them in. We'd love to bring them up on the show and have a great week everybody.