The evolution of market sentiment in the first quarter and beyond – IFA Magazine

In the first three months of 2024, stock markets continued the strong performance trend that was evident in the late part of 2023. However, some of the key drivers of this performance have changed, writes Patrick Farrell, Chief Investment Officer, Charles Stanley.

Performance at the end of 2023 resulted from the more encouraging tone from central banks on potential interest rate cuts. This was a significant change from the higher-for-longer messaging that was with us for much of last year. This optimism continued into 2024 as the market started to expect significant cuts starting as early as March with the expectation that there would be a rate cut at every meeting from then. The pace of interest-rate cuts expected by the market was overly optimistic and was not supported by the messaging from central banks.

As the optimism started to erode and rate cut expectations started to lessen the focus for shares moved to the earnings reporting season for the last three months of 2023. This was positive overall. And it gave investors renewed confidence that everything was fine and that the US economy was strong.

As a result, there was a broadening of market performance across companies and sectors and less, albeit still significant, focus on the Magnificent Seven stocks (Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Meta Platforms and Tesla) that had dominated market performance during 2023.

At least four of the Magnificent Seven were significant contributors to the performance of the index. This is particularly true in the case of Nvidia, as it beat some of the already lofty earnings expectations for the final three months of last year. Nevertheless, the earnings season in general was better than expected across the board and was the key driver of performance first three months of the year.

This broadening of performance away from just the big names is a sign that the US economy remains strong, particularly with a lift in consumer discretionary shares resulting from stronger consumer spending.

This strength is helping some other parts of the world, such as the economically struggling regions of Europe and Japan, to generate stronger-than-expected earnings results as well. This has resulted in stronger share performance across global sectors.

Considering the global sector performance over the last three and 12 months, there are initial indications of some sector rotation. However, this trend is unlikely to fully flip around in the short term, as technology and communication sectors retain strong growth prospects, even though much of the future optimism has already been priced into the market.

The strong performance for the quarter, driven by the better earnings results, tended to overlook the rapidly reducing expectations on interest rate cuts over 2024. Earlier in the year, investors were anticipating as many as seven to eight 0.25% rate cuts in the US over the year. It is now expected to be around three rate cuts, which was much more in line with indications coming from the central banks. This change in expectations saw US bond yields rise (as rates are expected to be higher for longer) but had little negative impact on shares considering the stronger earnings results.

Where to from here?

The key drivers for performance across asset classes moving forward are likely to focus on the following.

Company earnings

Many companies have been able to adapt, and prepare for, a slowdown in demand. This has not come through in the US, and now companies are more optimistic about the future and are positioning themselves accordingly. The first-quarter earnings have been generally positive, but companies that gave cautious outlook were punished. Momentum in sales and profits at the big cloud computing companies Microsoft, Amazon and Alphabet has justified their lofty valuations.

Rate cut expectations

There is likely to be more stability in speculation around interest rate cuts expected for this year as we travel through the second quarter, as central banks provide more guidance on key factors and timing. It is likely that the European Central Bank (ECB) and potentially the Bank of England (BoE) will start reducing rates before the Fed, as the higher rates have resulted in more material impacts on those regions than in the US, where the economy remains strong.

Central banks have highlighted that they are more comfortable about the continuation of the falling inflation that we have been experiencing. But are not convinced yet that it will sustainably move back to target levels. Inflation is still too high and stickier results from here will see central banks put it back into focus and will delay rate cut expectations as a response. It should be noted that the risks of sticky inflation are higher than the chances of undershooting inflation, and this is a risk for policy decisions over the next few months.

If the economy gathers momentum from here, these risks are amplified and rate-cut expectations will quickly reduce. This risk is more important in the US, where growth is strong, and less so for Europe and the UK, which is why there is the likelihood that European central banks will cut rates independent of the Fed.

Geopolitical risk

Gold and oil prices have been increasing as the escalation of hostilities in the Middle East and Ukraine pick up pace. This is a risk for markets, with the rising oil price not helping to bring down inflation. It therefore needs to be watched carefully and could be a key factor for the elections in many democratic nations this year. To discuss any of the themes in this article or for information on how Charles Stanley can partner with your business, contact Head of Strategic Partnerships, Tom Hawkins on 020 3627 3990, or email IST@charles-stanley.co.uk.

The value of investments, and the income derived from them, can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable guide to future returns. Charles Stanley & Co. Limited is authorised and regulated by the Financial Conduct Authority.

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About Patrick Farrell

Patrick is the Chief Investment Officer at Charles Stanley and has over 30 years experience in investment and management roles at some of Australias largest asset management companies. He was CIO for the Suncorp Group, the largest general insurance group in Australia, as well as BT Financial Group, the wealth and asset management arm of Westpac, one of Australias big four banks. Prior to that he held leadership roles in the areas of tactical asset allocation, collectives research and fixed interest portfolio management. He holds a Bachelor of Science majoring in pure and applied mathematics roles from the University of Western Australia and is a Graduate of the Australian Institute of Company Directors.

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The evolution of market sentiment in the first quarter and beyond - IFA Magazine