The second quarter of 2024 was built on the strength of the first quarter, with global equity markets rising by 2.6%. [1] Gains in global equity markets were thinly spread, with the US tech sector driving most of the returns, whilst UK share markets enjoyed good gains on the back of improving corporate earnings and a continued raft of bid activity.
Economic data continued to be positive (which in turn helped support stock markets), but the “cost” of this was stickier-than-expected inflation, notably in the US. This meant that the timing of interest rate cuts got dialed back, which in turn put pressure on government bond markets, with UK gilts returning -0.9% in the second quarter. [2]
Corporate earnings continued their rebound, with the last quarter seeing US companies grow their earnings at a rate just shy of 6%. [3] This made for the highest rate of growth in 2 years and also marked the 3rd consecutive quarter of earnings’ growth (following 3 consecutive quarters of contraction). Corporate earnings are the single biggest driver of stock market returns and the US makes up a huge piece (c70%) of the global equity stock market jigsaw, hence it was extremely encouraging to see such strong numbers. It’s worth noting however that not all sectors are equal and not all earnings are equal. To that end, it was very much the large US technology companies which drove gains, with some of the smaller, more consumer-focused companies feeling the pinch from higher interest rates.
The UK data was uniformly rosier, with inflation falling back to target and economic growth coming in at its best rate in 2 years. This, combined with a flurry of bid activity, helped drive the stock market to record highs, with Banking and Materials shares helping to drive gains in the index. Bid activity has been evident all year in the UK market, but excitement around this ramped up in April with Anglo American being bid for (previously bids have generally been targeting smaller companies in the index). 32 deals for UK companies were announced in the first half of the year, with 21 being announced in the second quarter; evidence that ramped up bid activity helped drive growth. [4]
Interest rates (and the timing of when they’ll be cut) continued to be a prevalent theme in the market direction. June saw the European Central Bank become the 4th of the G10 Central Banks to cut interest rates (cutting rates down to 3.75%), but global investment markets are more focused on when the US Central Bank (the Federal Reserve) will move to cut rates. To that end, US inflation is still running above 3% and Fed Chair Jerome Powell has noted a “lack of progress” on inflation. Bond markets had already moved to price out the 3 interest rate cuts that were signaled by the US Fed back in their March meeting and this was confirmed in mid-June, with just 1 interest rate cut being signaled by the Federal Reserve this year.
Emerging market assets continued their recovery this year, with the Chinese share market bouncing back amidst signs of stabilization and the Indian share market also posting good gains.
Geo-politics continued to play its role over the quarter, with a very busy election calendar. The surprise announcement of the UK election served to put the brakes on the UK market recovery (likely as investors wait for certainty around an outcome) and the snap French election put pressure on French assets in particular, but European assets more broadly as concerns around financing costs for increasing deficits reared their heads.
Although a choppier quarter than the one prior, the second quarter was one of improving earnings and gradually decreasing inflation. Whilst inflation (in the US) didn’t fall quite as quicky as the market might have liked, we’d note that it is at least stable which will give the Federal Reserve room to cut rates later in the year. This, combined with growing earnings should help investment markets continue to drive gains.
[1] Source Bloomberg.
[2] Source Bloomberg.
[3] Source Factset
[4] As per research by Peel Hunt
Investments can go down as well as up and you may get back less than you invested.
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