Global Markets Rebound Amid Optimism Over Interest Rates and AI
In the second quarter, equity markets worldwide experienced a significant upswing, driven by a positive outlook on interest rates and growing optimism around the impact of artificial intelligence. The quarter was marked by extreme market narrowness, with chipmaker Nvidia and tech giant Apple driving a substantial portion of the MSCI All Country World Index’s return.
Encouraging inflation data raised hopes that central banks would begin easing monetary policies, leading to a rally in global stocks. The US added jobs at a robust pace, although first-quarter GDP fell short of expectations due to slower consumer spending. In the eurozone, the European Central Bank lowered interest rates for the first time in nearly five years, citing improved inflation outlook.
European stocks faced pressure following the European Parliament elections, where far-right parties made significant gains. 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.
Despite these mixed signals, equity markets in both developed and emerging economies gained in the second quarter, with emerging markets outperforming developed markets. In the US, stocks outperformed due to strong earnings results and expectations of a more dovish Federal Reserve stance. Across the Atlantic, stocks gained but lagged the broader global index due to lukewarm earnings results and concerns over future rate cuts.
In fixed income, US government bonds started the quarter weaker but recovered towards the end. The yield on the 10-year US Treasury note rallied and closed at 4.40% at quarter-end. Credit spreads widened during the quarter, both for investment-grade and high-yield bonds. Emerging markets debt bonds were stable in hard currencies but lost ground in local denominations.
The US dollar had a strong quarter, with the US Dollar Index gaining 1.3%. Asian currencies, including the Japanese yen and Chinese renminbi, weakened against the US dollar. Commodities continued their positive performance, led by base and precious metals, followed by energy.
The Lazard Real Assets Portfolio’s institutional shares appreciated 0.71%, outperforming the Real Assets Blend Index. The commodities allocation was the top-performing component, thanks to exposures to silver, gold, zinc, and copper. Infrastructure and real estate lagged, with the MSCI World Core Infrastructure Index falling 1.0% and the MSCI ACWI IMI Core Real Estate Index retreating 1.9%.
Looking ahead, the global central bank hiking cycle of 2022-2023 may be followed by a similar cutting cycle, which could lead to a soft landing. Strong labor markets have been key to ongoing resilience across major economies, but gradual weakening could reach a tipping point and accelerate. Despite risks, we remain optimistic that relief from global rate cuts is on the horizon, which will be beneficial for both equity and bond markets.
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