Reflecting on the past month, Jeremy Richardson Senior Portfolio Manager, Global Equities, RBC Global Asset Management (UK) Limited discusses what may be driving strong momentum in global equity markets.
"Sell in May and go away" seems not to apply this year, as global equity markets have shown strong momentum and reaching all-time highs, despite a challenging news environment, including conflicts in the Middle East and concerns about oil prices impacting economic growth.
Markets appear to be embracing a "Goldilocks" scenario of balanced economic growth, with recession fears receding. While stagflation remains a possibility, the consensus leans toward a more stable growth outlook, particularly in the U.S.
Earnings Improvement: Early signs of improvement in earnings estimates and forecasts are emerging, which is positive as markets approach the second-quarter earnings season. However, this improvement remains narrowly concentrated among a small group of companies.
While soft data, such as surveys, shows signs of improvement, hard economic data remains lagging, reflecting earlier macroeconomic concerns. Investors are closely watching for broader signs of economic recovery.
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Transcription
Hello. This is Jeremy Richardson from the RBC Global Equity team here with another update.
It's been an interesting month. They say sell in May and go away. But that would have been a mistake this year because actually, we've continued to see very strong momentum from global equity markets. At the time of speaking, they're back to all-time highs, and that's quite remarkable when you consider the amount of news that investors have had to digest so far this month.
With actual conflict in the Middle East, with the possibility at the time of that actually pushing up the oil price to a level which would threaten potentially even broader economic growth. That hasn't happened, and so it feels as though for the moment that these markets are back to that sort of consensus that we spoke about last month, which is that, you know, the fears of recession have been put behind us, that there's still a possibility of stagflation, but the market seems to be focusing on the consensus at the moment that we end up with nice, balanced economic growth.
What you might call a Goldilocks kind of scenario, in particular for the US market and what we've seen over the course of the last couple of weeks or so, is just some early signs that earnings estimates are showing signs of improvement.
That's very, very welcome, obviously, because the higher the market goes, the greater the burden proof on earnings. So, it's nice to see that we've got some positive movement in earnings expectations and earnings forecasts. That's coming at a very opportune time because we’re coming up now to the second quarter earnings season where we get an update from companies on what they're making of the business conditions as we head through to the second half of the year.
Now, on that, the data continues to be somewhat mixed. But again, encouragingly, we’re beginning to see some signs of improvement in the soft data, even if it hasn't yet filtered through into the hard economic data. So, things like, surveys are showing some signs of improvement. That means the hard data is still perhaps more of a lagging indicator, reflecting some of that macroeconomic concern I was just, speaking about earlier.
So, as we head now to the to the end of the year, then I think investors will be hoping that this earnings improvement continues. For the moment, one of the things that we're paying close attention to is how narrow that earnings improvement is. It still seems very much focused on the same narrow group of companies that were leading the market higher at the end of 2024.
And I think as investors, we all would like to see that broadening out to include more companies, which will, be indicative of a, a more supportive, forecast and profit agenda. As investors, I think one of the things that, that we are paying very close attention to is not just the mix of companies, within the portfolio so that we can harness this, earnings improvement, but also the risk profile within the portfolio, because as we've have been through this period of volatility driven by macroeconomic, scenarios and, you know, maybe it was more sort of fortuitous, than otherwise that, the oil price did not escalate.
So good reasons, we think, to maintain a cautious approach in terms of managing risk and to ensure that the portfolio is well balanced, so you minimize the unintended volatility of some of these unexpected outcomes.
I hope that's been of interest. And I look forward to catching up with you again soon.