Inflation across the globe has either fallen or stabilized, which has led to improved confidence and taken the pressure off corporate profits. Lower inflation expectations and fewer mentions of recessions does a lot for business and consumer confidence.

Central banks have begun to cut rates in the economies where inflation is close to target levels. However, stubborn inflation in the US, UK and Australia means rate cuts have been pushed further into the future. Bond yields in many countries peaked in April or May – but they remain at elevated levels. Interest rates and the cycle of reduction is however key to several interest rate sensitive sectors and industries- a typical one being renewable energy!

The AI and big tech themes have continued to dominate equity markets through the second quarter. Indexes with exposure to the ‘Magnificent 7’ have outperformed across the board. Elsewhere, equities have made modest gains, apart from certain markets where unique factors are at play. The performance of country-specific benchmark indexes paints a different picture, with plenty of markets in the red for the year. Most of the variation can be attributed to three things.

• Some indexes are becoming very concentrated. For example, one company makes up nearly 30% of Taiwan’s index. China’s various indexes also appear to contradict one another due to slight differences in composition.
• The economic slowdown in China has affected its trading partners in Asia. But once again, the indexes reflect the performance of the largest companies – not necessarily the entire market.
• Recent political events have led to volatility in Mexico and France, which erased gains made earlier in the year.

Besides current live Notes, Cashbox Global notes launched this year have concentrated in the main on the US and Europe, with no country specific concentration. In that light it is worth mentioning those two economic areas specifically.

North America

US equities have benefitted from rising earnings across most sectors, despite rate cuts being pushed further into the future. Most of the index gains have come from big tech, while small-cap indexes are in negative territory year to date. There are smaller companies that are performing well, but there are a lot more that are underperforming.

In Canada, corporate earnings have fallen significantly in the last 18 months due to falling revenue and margin pressure. However, earnings are now declining at a slower rate, and investors are looking beyond the current profit slump. Valuations appear high but would look more reasonable if or when earnings do rebound. If you think that will happen, then today’s prices might be appealing!

Europe/EU

Europe’s economic recovery has been very slow as the continent dealt with high energy prices, high interest rates and low export demand. The outlook, however, has improved as energy prices and inflation have fallen and the ECB made its first rate cut in June.

Corporate earnings have begun to improve in some cases or stopped falling in others. There has been a sharp recovery in earnings for companies in France. Beneath the surface, the trend in profits varies widely across different sectors and industries, and this is the case for most European markets. Looking forward, improving GDP growth and lower relative valuations may support European markets

THE THIRD QUARTER | A GOLDILOCKS ECONOMY

The term ‘Goldilocks economy’ refers to a situation where economic growth is neither too hot nor too cold. In other words, growth isn’t high enough to cause inflation, but it’s also steady enough to keep sentiment and investment at healthy levels. Stock prices often do quite well under these conditions as expectations aren’t too high, and things keep turning out to be a little better than expected.