Five stock market talking points

Stocks have continued their ascent during the first half of this year. The MSCI All Country World Index (ACWI) – the global benchmark – has returned 11% so far in US dollar terms, hitting another all-time high in June (however, the index is still 7% below its late-2021 inflation-adjusted high).

Just as we did last year, below we flag five striking observations from stock markets at the halfway point of 2024.

1. Ongoing US exceptionalism…


The US has outperformed the global benchmark this year in common currency terms, and it now accounts for almost two-thirds of that index. ‘Growth’ and ‘cyclical’ style stocks have outperformed ‘value’ and ‘defensives’ this year (respectively), and the US of course has a higher weighting in technology (and other ‘growth’ style sectors). There have been healthy local currency gains in some other regions, but the stronger dollar has reduced their value to unhedged global investors. In the case of Japan, the yen’s collapse has translated a striking local currency gain of 21% into a USD return of just 6%.

Figure 1: Year-to-date ranked returns by region (%)


Five stock market talking points figure 1.jpg

Source: Rothschild & Co, Bloomberg, MSCI

2. …driven by a handful of (AI-related) stocks


Global stock market leadership has remained narrow this year, with the US mega-cap ‘Magnificent Seven’ cohort – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – reaping the rewards from ongoing AI-related momentum, albeit in a more fragmented manner (Tesla has bucked the trend and is down by a fifth this year). The Magnificent Seven have accounted for more than half of the MSCI ACWI’s 11% year-to-date return – roughly a quarter of global returns have been driven by Nvidia alone – and almost all of its second-quarter returns. Conversely, the equal-weighted US index was only up 5%, and US small caps’ returns were just 2% in 2024.

Figure 2: Year-to-date global stock market contributions (%pts, USD)

Five stock market talking points figure 2.jpg

Source: Rothschild & Co, Bloomberg, MSCI
Note: Magnificent Seven consists of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.

3. Not a frothy market (for now)


Global stocks have also become dearer this year. Our preferred long-term valuation metric, the cyclically-adjusted price-earnings (CAPE) ratio – the inflation-adjusted price relative to the inflation-adjusted 10-year moving average in trailing earnings – has risen to more than one standard deviation above its long-term trend. However, this is not alarmingly expensive. During the dot-com bubble, the global CAPE was more than two standard deviations above that trend and trading at over 40X, versus 25X today. While we don’t use valuations as a short-term timing tool, they can matter more when near extreme highs and lows – but that is not the case today.

Figure 3: Global stock market valuations (cyclically-adjusted price-earnings ratio, X)

 

Five stock market talking points figure 3.jpg

Source: Rothschild & Co, Bloomberg, Datastream, MSCI

4. Corporate earnings (and expectations) have turned a corner


Global earnings stagnated in 2023, meaning the last year’s stock market rebound was driven primarily by those rising valuations. Promisingly, trailing – or actual – earnings appeared to tentatively pick up towards the end of last year, most notably in the US, where there have been a few quarters of positive earnings growth. Admittedly, this has mostly been due to strong profits at some of the mega-cap names in the Magnificent Seven, but analysts are expecting earnings to broaden across other sectors this year, which is plausible given ongoing economic resilience.

Figure 4: Forward earnings expectations (12-month forward earnings per share, rebased to January 2019)

 

Five stock market talking points figure 4.jpg

Source: Rothschild & Co, Datastream, MSCI, I/B/E/S

5. Volatility remains unusually subdued

Stock market volatility has remained remarkably low this year. There has only been one trading day in 2024 where the S&P 500's daily price change has been greater than 2% (in absolute terms), following just two days in 2023 (compared to 46 trading days in 2022). In fact, global stocks have moved higher in a linear fashion since the end of October, aside from a brief sell-off in April. Moreover, from a cross-asset perspective, it is very unusual for implied volatility – derived from the prices of derivatives, or portfolio insurance – to be lower than normal for stocks, yet higher on average for bonds. It would not be surprising if stock volatility picks up from here, particularly given the busy political calendar, but for long-term investors it is the wider business cycle that matters more – and there are few signs of a downturn looming.

Figure 5: Cross-asset implied volatility (z-scores, normalised)

 

Five stock market talking points figure 5.jpg

Source: Rothschild & Co, Bloomberg

All charts and data as of 30 June 2024.

Ready to begin your journey with us?

Speak to a Client Adviser in the UK or Switzerland

Past performance is not a guide to future performance and nothing in this article constitutes advice. Although the information and data herein are obtained from sources believed to be reliable, no representation or warranty, expressed or implied, is or will be made and, save in the case of fraud, no responsibility or liability is or will be accepted by Rothschild & Co Wealth Management UK Limited as to or in relation to the fairness, accuracy or completeness of this document or the information forming the basis of this document or for any reliance placed on this document by any person whatsoever. In particular, no representation or warranty is given as to the achievement or reasonableness of any future projections, targets, estimates or forecasts contained in this document. Furthermore, all opinions and data used in this document are subject to change without prior notice.

Read more articles

  • The US consumer: mixed signals

    Strategy Blog

    Should we give US consumer spending the benefit of the doubt? Real wage growth has continued while rising interest rates have not affected all households in a consistent way. In this strategy blog we take a look at the health of the US consumer market.

  • The perils of making predictions

    Quarterly Letter

    History is littered with examples of people making predictions that later turned out to be inaccurate. How can we become better at forecasting the future? Our Quarterly Letter delves into this topic to investigate some of the perils of making predictions.

  • Rothschild & Co’s UK Wealth Management business names James Morrell as Deputy CEO

    Press releases

    The newly created Deputy CEO role will provide increased capacity at a senior level to help meet the growing demand for Rothschild & Co’s wealth management services from existing and future clients.

  • Rothschild & Co wins Western Europe's Best Bank for Advisory from Euromoney

    Awards

    This is the second consecutive year we have been named Western Europe's Best Bank for Advisory, reflecting the breadth of our capabilities across M&A and financing advisory across the region.

  • Is small beautiful again?

    Strategy Blog

    Large companies have typically offered far more attractive returns than their smaller counterparts, but that has changed recently. What’s behind the reversal? In this strategy blog we examine the reasons behind the switch and whether this trend is likely to continue.

  • A mid-year review with our CIO and Global Investment Strategist

    Perspectives podcast

    A mid-year review on the main macroeconomic developments and how our strategies have perfomed with our CIO Dr. Carlos Mejia and Global Investment Strategist Kevin Gardiner.

Back to top