Equity markets continued to rally last week, moving into positive year to date territory. Growth stocks led US shares higher, as mega cap tech names resumed their outperformance which characterised much of last year’s market moves.
Markets seemed to have regained positive momentum, following on from a shakier start to the new year and the S&P 500 now sits within touching distance of its all-time high. Signs are present that investors are buying into the rally, with retail investor surveys coming in very bullish.
While this may cause concern that positioning is too stretched and that equities may be due for a pullback from these levels, we remain positive on stocks.
One potential challenge to equity markets may come from the upcoming earnings season, which is now getting underway in the US. Global growth has been showing signs of weakness, as shown by our global growth scorecard which has moved deeper into negative territory (Chart 1). A weaker growth environment could be a headwind to corporate earnings.
However, even if earnings were to come in weaker, investors may be able to look through this in the knowledge that central bank easing expected this year, would likely lead to a turnaround in economic growth and an improvement in earnings later on this year.
We are cautiously optimistic that central banks will begin to cut interest rates in 2024 and we wouldn’t be surprised to see the soft-landing scenario to play out in the US. However, this view may change if inflation is stickier or if geopolitical risk pushes commodity prices higher, so we remain vigilant.
Chart 1: Royal London Asset Management growth scorecard and earnings revisions
Source: LSEG Datastream as at 04 January 2024. Past performance is not a guide to future performance.
This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.