Global Markets See Gains Amid Optimism on Interest Rates and AI
The second quarter saw a broad-based rally in equity markets worldwide, driven by a positive outlook on interest rates and growing enthusiasm for the potential of artificial intelligence. The narrow leadership of the market continued, with chipmaker Nvidia and tech giant Apple driving a significant portion of the MSCI All Country World Index’s returns.
Encouraging inflation data raised hopes that central banks would begin easing monetary policy, with the European Central Bank lowering interest rates for the first time in nearly five years. The US continued to add jobs at a robust pace, although first-quarter GDP came in below expectations due to slower consumer spending.
In the UK, the Bank of England held interest rates steady, despite slowing inflation, with rate cuts expected in the near future. European stocks faced pressure after far-right parties made gains in the European Parliament elections. The conclusion of the first-quarter earnings season presented a mixed picture, with US companies generally beating expectations while results in Europe and Japan were more in-line.
Against this backdrop, equity markets in both developed and developing worlds gained, with emerging markets outperforming. In the US, stocks outperformed, driven by strong earnings results and optimism around potential Fed rate cuts. Across the Atlantic, stocks gained but lagged the broader global index due to lukewarm earnings results, concerns about limited ECB rate cuts, and political risks.
In Japan, stocks declined due to profit-taking and concerns about the weakening yen’s impact on the economy. Meanwhile, China’s stock market outperformed, driven by policy support for the property sector and signs of improving economic outlook.
The Lazard Global Equity Select Portfolio slightly underperformed the MSCI All Country World Index in the second quarter. Stock selection in the industrials sector contributed to performance, with ABB reporting better-than-expected earnings driven by strength in electrification and process automation. Alphabet also reported solid results, including revenue growth and strong expense management, driving margin expansion and investments in artificial intelligence.
In contrast, stock selection in the consumer staples sector detracted from performance, with Estée Lauder reporting strong earnings but falling on lower-than-expected guidance and concerns around consumer/macro data points. Accenture’s shares continued to lag amid cyclical weakness, although the company reported better-than-expected earnings and maintained guidance for the year.
Looking ahead, we expect continued volatility as central banks navigate the balance between financial stability and inflation control. While artificial intelligence has the potential to transform companies over the long term, we remain cautious about valuations in certain stocks reaching unsustainable levels in the short term. Our focus remains on investing in quality companies that can sustain elevated levels of financial productivity and supplementing them with companies that can improve their financial productivity.
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