May 2024

After a strong first quarter, the markets experienced a setback in April, grappling with a series of conflicting reports.

  • A minor increase in U.S. inflation led to negative market reactions, raising doubts about potential interest rate cuts within the year and sparking discussions about a possible rate hike.
  • Although the International Monetary Fund (IMF) issued a more positive forecast for global growth, the U.S. economic growth figures for the first quarter indicated a slowdown.
  • Corporate earnings for Q1 ranged from satisfactory to good.
  • Stocks were down at the end of April but by May 3rd had begun to rally once more following a weaker-than-expected U.S. jobs report, which renewed expectations for potential rate cuts.

So, what have we learned? As we’ve consistently said in recent months, markets are currently volatile and highly reactive to new data. It seems that in April, markets paused to recalibrate expectations. As of the time of writing, after the May bank holiday weekend, it appears that market sentiment is stabilising once again.

Month and YTD Market Numbers

Global Growth: Steady But Slow And Differs by Region

The April 2024 International Monetary Fund (IMF) report describes a global economy that remained resilient through the disinflation period of 2022-2023, defying recession predictions with steady growth, employment, and income, supported by unexpected increases in government spending, household consumption, and labour force participation. Despite central bank rate hikes, household savings from the pandemic helped cushion economies.

Looking ahead, global growth is forecast to stabilise at 3.2% through 2025, though long-term growth prospects are subdued due to persistent global challenges like geopolitical tensions and economic disparities. Risks to the outlook are described as balanced, with potential downside from geopolitical tensions and high debt levels in many countries, and upside possibilities from fiscal policies and advancements in artificial intelligence. The IMF report underscores the need for central banks to manage inflation carefully and for governments to focus on fiscal consolidation and structural reforms to support sustainable growth and address challenges like climate change and geoeconomic fragmentation.

Since the IMF report it is noteworthy that we have seen somewhat of a slowdown in the US over Q1 and also a softening in the jobs market with the US March payroll numbers of 175,000 surprising on the downside.

Inflation Stops Falling In US and Impact on Interest Rate Expectations

The modest increase in U.S. inflation (referenced by the dark blue line in the chart below) has prompted a reassessment in the U.S. market regarding the likelihood and timing of interest rate reductions. In March, I reported a shift in market expectations from six anticipated rate cuts this year to three. By April, expectations had further adjusted to anticipate only one rate cut, with discussions even surfacing about the potential for a rate increase.

On May 1st, Jerome Powell addressed the markets, reinforcing the possibility that the Federal Reserve might maintain higher interest rates for an extended period. However, he effectively dismissed the likelihood of any additional rate increases.

Meanwhile, Euro inflation continues to fall leaving room for the ECB to start cutting rates.

Good Quarter One Company Earnings

With reports in for over 80% of S&P 500 companies 77% have reported a positive earnings surprise and 61% have reported a positive revenue surprise. Investment firms view the continued growth in earnings and revenue positively, though they note the performance variability across different sectors. The overall sentiment is cautiously optimistic, with expectations of sustained growth if current trends persist while noting the relatively full valuations with the forward PE of 20 (the 10-year average is 17.7).

It Remains Important to Keep an Eye on Technology Developments

An article in the Financial Times caught my eye in April. Australia and Queensland have invested $620 million in US start-up PsiQuantum to build a full-scale, commercially viable quantum computer near Brisbane. This marks a significant commitment to advancing quantum computing. The industry is experiencing renewed optimism, driven by technological advancements. Experts now believe that quantum computing is on the verge of providing practical and business advantages by the end of the decade. Watch this space.

It is also clear from company results / announcements during April that AI is growing in importance and for many of the big players it is a case of “go big or go home”. Some notable items:

  • Apple CEO Tim Cook recently emphasized generative AI as a significant opportunity, hinting at future iPhones with integrated AI capabilities. This strategic shift aims to revive innovation and address recent declines in iPhone revenue.
  • The surge in interest in generative AI has significantly increased electricity demands due to the energy-intensive nature of powering data centres that support AI computations. The International Energy Agency forecasts that data centres could consume over 1,000 terawatt-hours of electricity globally by 2026, roughly equivalent to Japan’s total electricity usage. Microsoft has entered into a “global framework agreement” with Brookfield Asset Management to develop $10 billion worth of renewable electricity projects which, in addition to helping to meet this increased demand, is also expected to contribute significantly to the renewable energy capacity of the US and Europe.
  • Alphabet’s (Google’s parent) market valuation crossed over $2 Trillion on the back of announcing its first dividend and strong growth of its cloud business reflecting the growing demand for AI technologies.

The year has started positively, and the outlook has gradually improved since the turnaround last October. However, we are aware that markets have already anticipated a lot of positive outcomes and that there are still risks that could disrupt markets. We experienced some of that in April.

We remain somewhat cautious and are less keen to have clients increase their equity holdings at these prices.  Of course, holding cash is comfortable when gross returns available are currently circa 3.9% p.a. Overall, these factors underscore the need for a measured approach to investment in the coming year.

John Tuohy is Chief Executive of Acuvest, an Irish-owned, independent advisory firm specialising in wealth management, pensions, and investment advisory services for individuals, companies, pension schemes, charities, and institutions. John is a Chartered Financial Analyst (CFA) and a Fellow of the Chartered Association of Certified Accountants.