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.
At a glance
Last week, investors were faced with both disappointing earnings news and encouraging macro data, resulting in a few volatile sessions for stock markets. Mid-week, the S&P 500 had its worst decline since 2022. However, thanks to favourable US economic growth and inflation data, markets were able to recoup part of the losses at the end of the week. The second-quarter GDP report showed that the US economy has been growing at an annualised rate of 2.8%. This is a notable increase from the first quarter’s 1.4% and better than expected. The US economy is growing at a solid pace, supported by healthy consumer spending and business investment, but is slowing from its high pace of 2023. This is in line with our base case of a soft landing, where growth slows without the economy entering a recession.
The US Federal Reserve’s (Fed) preferred inflation measure, the Personal Consumption Expenditures Price Index, excluding food and energy (core PCE), was released on Friday. It broadly met expectations of a 2.6% rise in June. Based on the current inflation picture and the cooling of the US labour market (while remaining solid), we expect the Fed to deliver its first interest rate cut in September. A macro backdrop of slowing, but positive growth, with central banks lowering policy rates, is generally a favourable environment for risk assets such as equities. This view is reflected in our asset allocation, where we hold slightly more equities (‘slightly’ as we’re also incorporating factors like valuations and (geo)political uncertainties) than our strategic allocation.
Weaker eurozone data only temporary, as service sector expanding and European Central Bank rate cuts supportive
The Eurozone Purchasing Managers’ Index (PMI) data for July came in below market expectations, pointing to ongoing weakness in the manufacturing sector – a global phenomenon. Economic activity in the services sector seems to have moderated but is still in expansion mode. Albeit from a modest level, we have been expecting an improving and above-consensus recovery for the eurozone on the back of rising real disposable household incomes and interest rate cuts from the European Central Bank (ECB). This is why, coupled with relatively attractive valuations, we hold somewhat more euozone equities in our flagship portfolios than we normally do. If more economic data were to point to weakening conditions, the ECB may be prompted to deliver more interest rate cuts than expected. That would be particularly beneficial for our tactical position in short-dated European government bonds (in euro-denominated portfolios). A similar reasoning applies to the UK and the Bank of England, as we have also increased our exposure to short-dated gilts in our sterling-denominated portfolios.
A tough week for US mega-cap stocks, but strategic case still compelling
With most Q2 earnings releases still ahead of us, it’s too soon to draw any conclusions, despite some notable disappointments. What’s telling, though, is that the bar set by investors is high, as we saw with Alphabet’s earnings report last week. Although the data surpassed analysts’ expectations on earnings and revenues, a miss on YouTube advertising revenues and concerns around the monetisation of artificial intelligence (AI), were enough for the share price to drop significantly. Together with Tesla’s earnings falling short of expectations, this triggered a broad market sell-off. US equity market volatility (the so-called VIX index) spiked to its highest level since April, increasing the value of the ‘insurance’ instrument we hold in portfolios (where permitted by client knowledge and experience, investment guidelines and regulations). Recently, investors have been favouring parts of the equity market that have previously lagged, at the expense of US mega-cap stocks. We think this is largely driven by hopes that certain companies will get relief from lower interest rates (as they hold more debt) or will be less vulnerable in a potential trade war under a hypothetical Trump presidency (those with more domestic revenues). Despite these shifts in investors’ preference, that are often short-lived, we continue to find the US mega-cap stocks attractive as strategic assets in portfolios. This is not only because of their access to growth themes such as AI, but also because of their superior balance-sheet strength, sales growth and profitability compared to the rest of the market.
This week: central banks, more Big Tech earnings and US labour market data
As the earnings season shifts into full gear, this week will see more of the ‘Magnificent Seven’ companies earnings reports: Microsoft (Tuesday), Meta (Wednesday), and Amazon and Apple (Thursday). Given the importance of these stocks to the broader market, investors will be closely watching to see if these firms continue to beat expectations. We will also hear the latest policy decisions from the Fed, (Wednesday), and the Bank of England (Thursday, when expect an interest rate cut). The Fed is set to hold its policy rate steady but is likely to signal a rate cut in September. An important data point for the Fed is payroll employment and overall labour market conditions, which will be released on Friday. Eurozone GDP growth and inflation (Tuesday and Wednesday), and Chinese (Tuesday) and US PMIs (Thursday), will offer a glimpse into economic conditions in these regions. The US election, obviously, remains in focus: with Kamala Harris having seemingly locked up the Democratic presidential nomination, the attention is now centred on potential Vice-President picks. While Trump still leads in the national polls, we’ll be getting more polls from swing states.
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Information correct as of 29 July 2024.
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