George Square Market Commentary in Conjunction with Albemarle Street Partners
A strong first half, with room for further gains as inflation falls
The second quarter showed a cooling in US inflation and a moderation in economic growth without significant disruptions. Federal Reserve Chair Jerome Powell emphasised that policymakers require more data before considering rate cuts.
In the UK, the economy expanded in the first quarter and surpassed forecasts. This growth effectively ended the shallow recession that began in late 2023, signalling a potential turnaround for the British economy. Inflation in the UK reached the Bank of England's 2% target in May, marking a significant milestone in the country's economic recovery. However, the impact of cumulative price increases over the past three years continues to affect living standards and political sentiment. The Bank of England is expected to wait until August before lowering policy rates.
The European economy is expected to experience a timid and patchy recovery, with annual growth projected at just 0.5% this year. While there are some positive signs, such as increased consumer spending, the overall outlook remains subdued. Despite concerns about inflation stickiness the ECB delivered its first rate cut since 2019, lowering the deposit rate to 3.75%.
China introduced bold measures to revitalise its struggling property sector, aiming to stabilise a market that is crucial to its economic growth. These initiatives included allowing local governments to purchase apartments and relaxing mortgage rules.
Global equity markets delivered strong returns in the first half of 2024, with US equity indices reaching record closing highs. The US stock market rally was primarily driven by the technology sector, particularly the surge in AI-related stocks. However, concerns about the concentration of returns in a handful of tech giants have emerged, as the equal-weight US equity index, a proxy for the average stock, only rose 4% year-to-date.
Earnings performance in the first quarter of 2024 was robust, with US large cap companies reporting their highest earnings growth rate (5.7%) since the second quarter 2022. Analysts project 11% earnings growth for US larger companies in 2024, indicating a favourable backdrop for equities.
As the second half of 2024 unfolds, market participants will keep a close eye on the US presidential election, as political uncertainty is expected to become a more significant factor influencing asset prices. Closer to home, investors will weigh up policy announcements by the incoming government as they set their stall for a 5-year term. Changes in tax and trade policies will be key to investor sentiment.
Conclusion:
The first half of 2024 demonstrated the forward-looking and resilient nature of financial markets. A complex macroeconomic and political backdrop failed to deter investors as corporate profits, the lifeblood of equity markets, started recovering. The second half holds the potential for economic and political turmoil. Maintaining a diversified portfolio whilst allocating to attractive opportunities will be key to delivering better outcomes for our clients. We remain mindful of incoming market and economic data and will adjust portfolios if warranted.
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