Global equities continued their upward trajectory in the second quarter, posting a 2.2% gain, marking the third consecutive quarter of growth. The market has now rebounded by nearly 25% from its September lows. Several factors have driven this growth, including strong corporate earnings, easing inflationary pressures, and anticipated productivity enhancements from artificial intelligence.
The United States remains the dominant force in the global equity landscape, with the “Magnificent Seven” – led by Nvidia – accounting for over 60% of the US market’s gains. Spending on AI has been a significant driver of earnings growth for related companies, including utilities, due to high electricity demand. This has created a bifurcated market, with the average US stock underperforming the broad cap-weighted index by nearly 10% year to date, a level not seen in over 35 years.
Asian markets had a strong quarter, although they still lagged behind the United States. Taiwan, with its dominant technology exposure, led the region, rising over 15% in the quarter. India recovered in June after surprise election results, which may temper Prime Minister Modi’s political powers. China rose more than 7% in the quarter as the government took stimulus actions to address its real estate overhang and weak consumer spending.
European stocks delivered a positive quarter as the eurozone continues to deal with inflation that remains above the European Central Bank’s 2% target. Wage pressures continue to drive inflation fears as labor shortages and low unemployment persist. Despite the inflation news, the ECB cut its interest rates from 4% to 3.75%, arguing that it was still far from a neutral rate and needed to spur the economy.
Sector performance reflected the narrow market, with only five sectors finishing with a positive return in the quarter. Information technology and communication services stocks dominated the market with returns of 11% and 8%, respectively. Real estate and materials stocks lagged.
Several companies have reported strong earnings, including Roche, which achieved a 2% growth rate at constant currency following the first-quarter results. Walmart delivered impressive first-quarter results, driven by its competitive pricing and strategic digital investments. Bristol-Myers Squibb’s first-quarter results were mixed, with new-product sales falling short of market expectations. CVS Health reported weak first-quarter results, primarily due to reduced profits in its Medicare Advantage segment.
As we look forward to the balance of 2024, we expect that US inflation will continue to ease, and the strength of the dollar will take a greater toll on corporate profits. This should allow the US Federal Reserve to cut rates at year-end, providing a lift to equity investors. The November election will certainly raise investor anxiety and add to market volatility. Conditions in Europe should favor further central bank easing and economic growth. China’s government continues its desire to stimulate its economy, and we expect more specific stimulus to be announced during the Third Plenum in July, which may provide reasons for optimism over the latter half of 2024. Japan also appears to be on a path to balancing growth and inflation, and we see an end to its zero-interest policies finally supporting the yen.
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