This note contains an overview of our market views, what we are watching, and our portfolio strategy. Any reference to portfolio positioning relates to our flagship discretionary portfolios. Clients with bespoke or advisory portfolios should consult their Client Advisor for the latest update on your portfolio.
Artificial Intelligence (AI) has been one of the biggest market stories over the past couple of years. At the centre of it all is Nvidia, the California-based company that up until a few years ago was mostly known for its graphic cards used in the video-game industry. Well before the launch of ChatGPT, the chip company made an early bet on AI that paid off enormously, making it one of the most valuable publicly listed companies in the world. Last Wednesday, Nvidia released its highly anticipated second-quarter results. Once again, earnings and revenues exceeded analysts’ expectations, driven by strong demand for Nvidia’s products. Nvidia also raised its guidance on profits for the current quarter. However, despite these solid results, the stock price fell. It seems that investors were disappointed that the company didn’t beat its earnings and revenue projections by a wider margin. This market response was similar to those of other ‘Magnificent Seven’ technology companies, where smaller beats on profits and revenues led to muted share price reactions.
With the second-quarter earnings season now mainly in the rearview mirror, we can conclude that earnings results for the S&P 500 companies, on an aggregate level, came in on the strong side. Despite some pockets of weakness, most notably from companies exposed to revenues from China or low-income consumers, S&P 500 earnings grew at a double-digit rate compared to a year ago. Contrary to previous quarters, it’s not just the ‘Magnificent Seven’ driving earnings growth. Outside of this group, the average company delivered decent earnings-per-share growth at a mid-single digit pace. Furthermore, profit margins grew slightly, which is indicative of a healthy corporate environment.
In addition to a solid earnings season, US economic data are looking healthy and remain, by and large, in line with our expectation of positive but slower US economic growth. This has been supportive of our equity portfolios, which have recovered from early August, when they briefly suffered following a weak July jobs report in the US. However, as the US presidential election draws closer, we expect markets to become more volatile and continue to keep our portfolios well-diversified across assets, regions and sectors. Plus, the equity ‘insurance’ instrument we hold in portfolios (where permitted by client knowledge and experience, investment guidelines and regulations) aims to mitigate the impact of possible adverse market scenarios.
US and Eurozone inflation data strengthen the case for rate cuts
In the US, the core personal consumption expenditures (PCE) price index, which excludes volatile component such as food and energy prices and is the preferred inflation gauge but the US Federal Reserve (Fed), showed a moderate increase of 0.2% in July, which was in line with market expectations. On a year-on-year basis, the core PCE inflation rate stood at 2.6%, slightly below expectations.
In the Eurozone, inflation figures also showed a favourable trend. The August flash consumer price index (CPI) rose by 2.2% year-on-year, marking a significant decline from July’s 2.6%. Core inflation also slowed to 2.8%, down from 2.9%.
As inflation has continued to moderate in recent months, the case for rate cuts by the Fed and the European Central Bank (ECB) has strengthened. Fed Chair Jerome Powell’s comments at the Jackson Hole gathering of central bankers also suggest that the Fed is ready to shift its focus from taming inflation to supporting job creation and, therefore, overall economic growth. We expect the Fed and the ECB to deliver a rate cut in September, followed by additional cuts later in the year, one to two cuts for the Fed and one for the ECB. This is likely to be positive for markets, which is why we own slightly more equities versus our typical, long-term asset allocation, and have a preference for short-dated European government bonds (short-dated gilts in sterling portfolios) and European high-quality corporate bonds, which should benefit from rate reductions.
This week: focus on US jobs and US Purchasing Managers’ Indices
As we look to this week, the most significant data will be the US jobs report (Friday), which will provide important insight into the health of the labour market. A stronger-than-expected employment number, or a lower-than expected unemployment rate, could reduce the number of rate cuts that markets are currently expecting. On the other hand, a weak report could strengthen the market’s expectations for more sizeable rate cuts. The release of the US Purchasing Managers’ Indices (PMIs) from the Institute of Supply Management for the manufacturing (Tuesday) and services sectors (Thursday) will give us more information on the growth outlook for the US economy.
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Information correct as of 2 September 2024.
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