United States
Magnificent 7 hits new highs
Christopher Broadley, Portfolio Manager at Insight Investment, said: “The Magnificent 7 achieved new highs this week driving another solid month for US equities as the market capitalisation of these stocks as a percentage of the S&P 500 Index hit a new high of 32%. Caution of any such concentration is generally wise, although it’s important not to overlook the fundamentals that have underpinned this move. In the current earnings cycle Apple has announced a $110bn buy-back programme, while Alphabet declared its first ever dividend. This week’s move has been driven by Nvidia, which has found itself at the forefront of the current Artificial Intelligence boom. A 226% increase in year-on-year revenue sent the stock price up by 20% since the company released its earnings, propelling it to within a whisker of becoming the 2nd largest company in the US.”
Source: Insight Investment & Bloomberg as at May, 29 2024.
The great volatility divergence
Jonathan Crone, Portfolio Manager, Insight Investment, said: “A notable phenomenon in US markets is the sharp divergence that has occurred in bond and equity markets volatility. The most widely followed gauge of implied equity market volatility, the VIX Index, has fallen to its lowest level since the pandemic in 2020, but the equivalent index for government bonds, the MOVE Index, remains well above pre-pandemic levels. Although this divergence might seem counterintuitive it has been driven by the fact that global growth has remained sufficiently strong to support an improving earnings trend, while also keeping inflation stubbornly high. The improvement in earnings has supported equity markets, buoying risk sentiment, but inflation uncertainty has left markets constantly pushing back rate cuts and creating volatility in bond markets. We believe this gap should start to close in the year ahead as central banks eventually start the easing process, providing a better anchor for bond markets and easing volatility†.”
Source: Insight Investment & Bloomberg as at May, 22 2024.
Outperformance of cyclical assets points to rebound in US growth
Steve Waddington, Co-Deputy Head of Multi-Asset Strategy, multi-asset strategy team, said: “This week’s chart looks at the strong relationship between US manufacturing and the equity performance of cyclically sensitive companies relative to defensive companies. We have noted for a while that manufacturing PMIs (one of our preferred indicators of global growth) had started to show signs of turning. While the time to recovery thus far has been longer than the historical average, the chart below indicates that the ISM could soon move higher†.”
Source: Source: Insight Investment & Bloomberg as at 15 May 2024.
A sweet spot for global equity markets?
Insight’s Jonathan Crone, Portfolio Manager, multi-asset strategy team, said: “After a modest earnings recession, which began in Q4 2022, global corporate earnings are once again on an improving trend – currently rising by 7% year-on-year. Critically, this is not just a US story, with signs of improvement across major developed markets. Encouragingly, the number of European corporates reporting earnings above the levels predicted by analysts is well above historical levels, with rising margins a key driver of earnings growth. With margins often a leading indicator on the business cycle it suggests we may be in a sweet spot for global equities, with resilient growth, rising earnings and a more favourable interest rate backdrop all potential tailwinds in the coming months†.”
Source: Deutsche Bank, Bloomberg & Insight Investment as at 07 May 24.
Higher velocity moves in government bond yields hurt equities in April
Insight’s Christopher Broadley, Portfolio Manager, multi-asset strategy team, said: “This week’s chart highlights the interaction between government bond yields and equities in 2024, particularly how the latest leg higher in yields has stalled the equity rally. For most of the first quarter, yields trended higher as the combination of strong growth data and upside inflation led investors to push back the timing of expected rate cuts. Against this backdrop, equities enjoyed their third strongest start to the year since 2000. However, as upside inflation surprises have continued, the rate of change of yields has increased and in turn created a tough environment for risk assets†.”
Source: Bloomberg & Insight Investment as at May 01, 2024.
Most read
Fixed income
August 2022
Is it time to consider high yield?
Liability-driven investment, Fixed income
July 2022
Liability Driven Insights: A pit stop on your de-risking journey
Global macro
April 2022
Global macro research: Modeling the persistence of US inflation
Global macro, Fixed income
May 2023