Let’s start maybe with the bottom line: Last week’s cooling US CPI sent a strong signal through markets: rate cuts are coming (even if slowly) and inflation is no longer threatening, the equities rally is broadening, and now is the time to lock in yields and move out of cash.
Equities – the S&P 500 made last week three new all-time highs with 0.76% gain (18.1% YTD), while the equal weighted S&P 500 started to close the gap by gaining +2.72%. The Russell 2000 jumped +5.38% (7.9% YTD) closing at its highest level since January of 2022.
The concentration of equity gains in AI stocks should be a trigger to check levels of diversification. That’s particularly relevant given that fixed income offers higher rates, which makes portfolio rebalancing more appealing. There is no better time than the present to lock in longer durations on fixed income returns.
Asia – Chinese equities are trading at 9.4 P/E which represents attractive valuations. However, net earnings growth is still negative – signaling that the dust has not fully settled. Net earning revision of Japanese equities are positive with analysts expectation for continued growth.
Bonds – the second quarter was characterized by the fact that risky investments in particular performed better than the usual “safe havens”, such as government bonds. US investment grade bonds rose minimally (+0.1%) while euro bonds fell by 0.9%. US high-yield bonds gained 1.1%.
Commodities – The price of gold (17.1% YTD), and with it gold mining shares, continues to benefit from the strong perception of uncertainty about political developments and unsustainably financed national budgets. Added to this are the extensive purchases by various central banks. Silver, which is still far below its historic highs, could also surprise many market participants positively over the course of the year. Uranium is up 57% in the last 12 months as the deficit for nuclear capacity expands.
AI Sentiment
Last week, Russell 2000 outperformed the S&P 500 the most since March 2020 and the equal weighted S&P 500 outperformed the market cap weighted index by almost 2%. Small & medium cap stocks have more room to run going forward especially as the easing cycle arrives. With the S&P 500 up 18.1% YTD one should be searching for opportunities to achieve return goals with the lowest risk required.
Sentiment toward AI-exposed equities is the strongest since 2019 and free cash flow at the bulk of those firms is forecast to outstrip analyst expectations. According to Citibank, readings like that typically suggest “significantly more volatility” is on the way. And while there may be no signs of an overall price bubble, the rally in some names is “concerning,” they said. Their warning comes after AI has powered stocks to all-time peaks, with Nvidia briefly becoming the world’s most valuable company.
Fiscal Deficits
We are heading toward a US presidential election where both candidates show no concern for fiscal deficits or pro-cyclical government expenditure. The estimated annualized payments to service the US government debt surpassed $1.1 trillion and are still rising almost parabolically.
While back at home, Israel’s deficit peaked in June to a terrifying 7.6% GDP and counting….
