ClockWise: Concern around narrow equity rally?

Despite elections around the world bringing uncertainties, global equities have rallied back to all-time highs again, with the demand for artificial intelligence pushing Nvidia to become the second-largest company in the world.

Stock markets have been climbing the wall of worry since April, when our sentiment indicator indicated a contrarian buy signal. The recovery has been particularly narrow though, with the equally weighted S&P 500 seeing relatively muted returns, leading to a near-5% outperformance of the market cap weighted index (Chart 1).

Chart 1: Global stocks breadth narrows

Source: LSEG Datastream as at 07/06/2024

Our latest update shows that the Investment Clock remains in the Overheat phase for the second consecutive month (Chart 2) as global growth remained resilient overall while the disinflationary progress became more mixed with services inflation remaining relatively sticky. Equities tend to beat bonds during this phase of the business cycle.

Chart 2: Investment Clock is in Overheat

Source: RLAM. For illustrative purposes only. Trails shows monthly readings based on global growth and inflation indicators.

While the narrow rally in stocks could be of concern to some investors, it’s positive that the rally has been supported by strong underlying earnings trends. We are still positive on the outlook for equities and the technology sector, where we have seen stronger-than-average earnings growth. We also remain negative on bonds.

We continue to monitor developments of the business cycle and remain data dependent.

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