Stock markets showed impressive, some would say heroic, resilience in the face of another week of largely bad news. Europe was again at the centre of a geopolitical maelstrom, as fears grew that the Nord Stream natural gas pipeline from Russia to Germany, which had been closed for maintenance, might not re-open. Gazprom, the pipeline’s operator, certainly gave that impression when it invoked force majeure clauses in its contracts with European buyers. There were even rumours that European Union officials had begun to plan for voluntary rationing, with a 15% cut in natural gas usage being proposed to member states. As the week went on, Gazprom did eventually resume supplies, but at a much lower rate of flow, and public remarks by Russian President Putin made it clear that the pipeline will remain a geopolitical hot potato.

But markets held their ground. Nor did they buckle when the European Central Bank announced a surprise 0.5% rate-rise, accompanied by the grim acceptance that inflation is undesirably high while growth is slowing materially. Somewhat ominously, the ECB gave up its policy of guiding investors towards the path of future rate rises, and will now simply respond to the data as it sees fit. Like the US central bank, the ECB is now prioritising inflation over growth. As if to prove the point, monthly business surveys showed that commercial activity had slumped in both Europe and the US to levels that are consistent with recession. Europe and, more specifically, European stagflation will remain in focus this week when the latest figures for Eurozone GDP growth and inflation are due to be reported.

The geopolitical and economic news took a backseat, however, as investors monitored the quarterly earnings reports of, mainly, American companies for clues to future trends in profits. Though the reports were mixed, about two thirds of companies reporting have been able to beat investors’ expectations, so far. This is in line with historical norms and suggests that, though profit-growth may be slowing, it is not sinking without trace. Indeed, some companies that missed the profit expectations of analysts were treated relatively generously by the market, suggesting that a newfound optimism does indeed underlie the market movements of the past few weeks.

This sentiment may derive from the recent improvement in bond markets, which have reacted positively to higher rate rises, perhaps regarding them as restoring the credibility of central bankers in the fight against inflation. Equities can benefit from the stabilisation of inflation expectations because it removes a source of risk to future growth. However, equities must also run the gauntlet of slower growth expectations between now and the eventual slowdown in the rate of inflation which, for most countries, is expected to occur towards the end of the year. The path of markets from here may depend, ultimately, on the behaviour of consumers. Some are already struggling with inflation, as witnessed by Walmart’s latest profit warning (see below); others can choose to eat into their savings in order to preserve current spending, but they cannot do this forever. The problem for investors is to assess how much of this pain is already evident, and how much is yet to come.