Some think the equity market environment right now is about as optimistic as it gets, particularly in the US which has led the way with its mega-cap tech companies and its robust economic growth. In Australia, valuations are not as stretched as they are on Wall Street. But in the US, the optimism about Artificial Intelligence and global growth has certainly buoyed the investment mood, even without central banks cutting rates as we had all earlier hoped for. Markets are near record highs, and the 5% correction we had last month appears to be in the rear-view mirror.
Since Jerome Powell told us that the US Federal Reserve’s (Fed) next move was “unlikely” to be a hike, we now know the rise in rates is probably capped, limiting downside risk. A similar message was received from Governor Michelle Bullock of the Reserve Bank of Australia (RBA). The slow pace of growth in Australia makes a rate rise very unlikely, whereas the strong growth in the US suggests more growth in earnings to come.
But there is a tension here. Either growth and inflation have to slow and rates fall, or growth and earnings have to surprise on the upside and rates stay high or even rise. The likelihood is the former, with inflation continuing its bumpy ride to a lower level, however long it takes.
The US is already seeing a slower consumer. CEOs at US consumer companies are sounding more cautious and appear to be concerned about consumer fatigue.
Source: Bloomberg
Consider:
- Starbucks CEO: “Many customers are being more exacting about where and how they choose to spend their money”.
- Amazon CEO: “Customers are shopping but remain cautious, trading down on price when they can, and seeking out deals”.
- McDonald’s CFO: “The macro headwinds have been more significant than I think we even anticipated coming into the year. And we continue to see those macro headwinds as we have started quarter two”.
Meanwhile, the International Monetary Fund (IMF) says the outlook for Asia and the Pacific has turned upward just as the US is potentially slowing. They are talking about 4.5% growth this year on top of the 5% in 2023. And with Europe growing as well, having recovered from recession, the baton looks to be moving from the US to the rest of the world. Perhaps the rally in risk assets globally still has legs.
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