Morning Note: Further Thoughts on US Markets and an Update from Sodexo
Market News
US equities moved higher last night – S&P 500 (+1.1%); Nasdaq (+1.4%) – while 10-year Treasury yields slipped to 4.24% overnight. This was after the Federal Reserve held its interest rates unchanged on Wednesday, as expected, and announced it will slow its balance sheet runoff next month. Fed Chair Powell said “we still see solid hard data on growth, spending, unemployment, long term inflation expectations well anchored, recession odds have moved up but are not high”. Rate futures were loosely unchanged as markets continued to price two 25bps rate cuts in the second half of the year.
The FTSE 100 is currently 0.3% higher at 8,733. Companies trading ex-dividend today include Pearson (1.31%) and Beazley (2.78%). UK average earnings rose by 5.8% year on year, in line with expectations, while consumer confidence stabilised after February’s record low. The Bank of England is expected to keep policy on hold at 4.5%, with rates forecast to end the year at 3.75%. Sterling trades at $1.2966 and €1.1928.
Gold moved up to $3,045 an ounce, while Copper is trading above $10,000 a ton amid the threat of higher tariffs.
President Zelenskiy agreed to a proposal for a mutual halt to strikes on energy assets. Meanwhile, the EU is to exclude US, UK, and Turkey from its €150bn rearmament fund. The move will cause significant consternation in Britain’s defence sector. One senior UK defence industry insider said it was a “considerable concern”, adding: “We see a huge amount of opportunity and it’s right the UK is seen as part of Europe. But if the EU — and especially France — is going to be transactional about this, it undermines the entire philosophy of a joint and unified Europe in defence and security terms.
Source: Bloomberg
Investment View – US Markets: Further Thoughts
If there is any truth at all to the old saw, “there are no bad assets, only bad prices” then over different periods and cycles we would expect the relative performance of different markets to ebb and flow over time. However, before we discuss the recent weakness in US Markets it is important to provide some context.
S&P 500 Total Return Relative to MSCI World (Ex-US) Total Return. (2000-Present)
Source: Bloomberg
The long-term chart above shows the relative returns of US equities relative to the rest of the world since 2000. After seven lean years from 2002 where international stocks handily outperformed, the US, with a more contemporary interpretation of the term biblical, went on to trounce international stocks consistently, for the next fifteen years. Before we go on to discuss both recent moves and speculate about the future it is important to recognise that this is where we have come from.
S&P 500 Total Return Relative to MSCI World (Ex-US) Total Return. (2020 - Present)
Source: Bloomberg
The chart above shows the more recent data. While the polls seemed close, in the run-up to the election in November, markets were convinced Trump was going to win. US markets surged ahead of global markets in the second half of 2024 as the expectation of a Trump victory was priced in and then on the euphoria of the event itself. The reversal of this move has happened quickly as investors are starting to understand what a second Trump term might mean.
Much of the narrative around the outperformance of US equities gets distilled down into a single phrase; “US Exceptionalism”. This “capture-all” phrase says the US market has done the best because it has all the best companies; especially those centred around technology. As with any dominant narrative, there is a kernel of truth behind it, but it is far from the only factor.
Trump’s flagship policy is to reduce the country’s trade deficit. However, the pesky arithmetic of the balance of payments means that a capital account deficit must be offset by a surplus in the current account as foreigners accumulate claims on US assets.
US Balance of Payments 1983 -2024 – The Mirror Image of Trade
Source: Bureau of Economic Analysis
The size and persistence of these trade deficits mean claims on US assets have grown significantly over time, which is captured in the country’s Net International Investment Position (NIIP). The chart below shows that foreigners own approaching $25tn more US assets than the US owns of foreign assets.
US Net International Investment Position
Source: Bureau of Economic Analysis
Foreign investors’ claims on US assets can manifest at the private sector level through portfolio investments or at the foreign official level (central banks etc.). The chart below shows flows into US Treasuries. Note the foreign official sector stopped accumulating US government debt on a net basis in 2014, while private sector claims added another $2tn in the next decade.
Private and Official Holdings US Treasuries
Source: Apollo
This however only counts for part of the roughly $7tn cumulative deficits over the period. The rest will be found in a wide range of US assets, but given the explosive moves we have witnessed, it is likely that much of this capital has found itself a lofty perch in the highest branches of the Nasdaq 100.
If we look within our own industry, it is not hard to see how this has occurred. The UK pension fund industry, which once owned a significant percentage of UK plc., now only has a 3% allocation to UK equities. As global benchmarks became prevalent, UK domestic savings flooded out of the UK market into the US.
However, the first couple of months of the Trump Administration should leave investors under no illusions that the US has resolved that the current arrangement is no longer in the national interest and that things will need to adjust. Below is just a small collection of recent Bloomberg headlines of where this could be heading.
“UK government officials are piling the pressure on pension fund managers to commit 10% of their assets to listed and unlisted British equities as part of a rebooked Mansion House compact in the summer.”
“State Street at Risk of Losing $52 Billion Swiss Pension Mandate”
“US President Donald trump’s back and forth tariff threats are galvanising an “invest in Canada” movement that’s prodding pensions to keep more of their cash at home”
“Tariffs on goods may be a prelude to tariffs on money” FT
These flows don’t need to turn into a flood to be impactful, they can happen at the margin. At approaching 70% of global market capitalisation, the US need to capture 70% of the total flows into equities to hold its own on a relative basis. The events of recent weeks make this incrementally less likely that at any point since the birth of the current incarnation of US exceptionalism, 15 years ago.
Company News
Sodexo has released an unscheduled trading update for the first half of its financial year to August 2025 (FY25). The company has suffered slower than expected organic growth in North America and in response has lowered its guidance for the full year. Further details will be provided in the upcoming results announcement, scheduled for 4 April. The shares have been marked down 15% this morning.
The update provides a negative read-across for industry peer Compass Group, although we would highlight the company-specific nature of much of Sodexo’s woes and point to the upbeat trading statement released by Compass last month. Despite this, the shares have been marked down over the last two days. We are next scheduled to hear from Compass at the time of its results on 14 May.
Sodexo is a global supplier of food services and associated facilities management (FM) support functions, with a strong position in benefits and rewards services. The company generates annual sales of around €24bn and is listed on the French CAC 40.
Under its 2025 strategic plan, Sodexo aims to generate sustainable, profitable growth and create value for its shareholders. The group plans to refocus on food services and be more selective in facilities management. This leaves the company well placed to take better advantage of the emerging trends in the post-Covid environment such as increased outsourcing, accelerated services integration, and further market consolidation to the benefit of larger players.
The spin-off and listing of the group’s Benefits & Rewards Services division, known as Pluxee, took place last year, leaving Sodexo as a pure-player in Food and FM services.
In the six months to end February 2025, revenue grew by 3.1% to €12.5bn. Stripping out the impact of currency (-0.1%) and M&A (-0.3%), organic growth was 3.5%. The second quarter (+2.4%) saw a deceleration versus Q1 (+4.6%). Client retention stood at 93.9% with a development (i.e. new business) of 7.3%.
In North America, organic growth was 3.5%, lower than expected, and well below the 5.9% growth in the first quarter. Education was affected by the continuation of soft volumes, and Healthcare by delays in the opening of new contracts. Encouragingly, Business & Administrations demonstrated good organic growth.
Europe was up 2.1% organically, with good performance in Healthcare & Seniors but continued soft growth in Facilities Management. In Rest of the World, Organic growth was 6.6%, fuelled by strong performance in Australia, India, and Brazil
In response to the shortfall, Sodexo is strengthening execution on identified areas where improvement is required, with a particular focus on North America towards commercial discipline and operational execution, as well as global organisational efficiency and strict overhead cost control.
Underlying operating profit rose by 6.4% at constant exchange rates to €651m, with the margin up 10 basis points to 5.2%.
Guidance for the full year has been lowered: organic revenue growth is now expected to be between 3% and 4%, versus 5.5%-6.5% previously. The downgrade is primarily driven by weaker-than-expected volume trends in Education, which are expected to persist. Additionally, in North America, delays in certain contracts start dates in Healthcare, and softer commercial performance in the first half have impacted expectations for net new contributions in the second half.
The underlying operating profit margin is now expected to increase by 10-20 basis points at constant exchanges rates, below the previous guidance for a 30-40bps rise. The reduction mainly reflects the full-year impact of the revenue shortfall.
Source: Bloomberg
