Reflecting on the past month, Jeremy Richardson explores;
How we see the rate cut in December by the US Federal reserve impacting markets.
Why changes in the US in the coming months will be significant for the broader investment opportunity set.
Bunching in the market may be unsettling, but we are in an interesting moment in the earnings cycle with 2024 reporting coming in.
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Transcription
Hello, this is Jeremy Richardson from the RBC Global Equity team here with another update.
I know a lot of investors at this time of year will be trying to anticipate what 2025 will hold, waiting to find out what the new incoming presidential administration in the US will be doing, but it's not only investors who are trying to wait and see. It feels as though a lot of the central bankers are, too.
In December, we got a 25-basis point cut by the US Federal Reserve. That was as expected, but what's really interesting about the cut was that the committee noted that some of its members had been trying to factor into their assumptions about the future, what the incoming president may do, and that meant that although we got the cut in the short term, the messaging around that was actually quite cautious, essentially saying we prefer to wait and see what happens, and so we're less inclined to make significant additional cuts from here.
So in effect, it was a bit of a slightly hawkish message, and that had quite a significant effect upon equity markets as we headed towards the calendar year end.
Now, in previous conversations, I've noted how, the market has wanted to try and broaden itself, that the performance that we've seen, having been concentrated in large caps, particularly in the half year point in 2024, was experimenting with trying to broaden out, small mid-caps were actually beginning to join the party. Well, that didn't happen in December. In fact, it went into reverse. It's like the interest rate sensitive parts of the US economy, actually gave back a lot of those gains, and it was the large caps that led the market towards the calendar year end.
So for investors, as we sit here now, as we look forward to 2025, we're in a slightly less comfortable position in some respects because although market development for 2024 generally was pretty good, it's left us with what feels like a little bit of a top-heavy market, with so much of the recent performance being generated by a comparatively small group of large, mostly US companies, in fact, the top ten largest companies in the MSCI World Index, which is an index of developed global equity markets, is about 27% as we sort of sit here today, and that I think approximately must be very close to being an all-time high.
So that's a little unsettling, having that sort of bunching within the market, but we're also at a very interesting moment in terms of the earnings cycle, because we are just beginning to anticipate now companies reporting for 2024 so we get to see what their fourth quarter earnings announcements are like; and generally the mood music seems to be pretty supportive because we're getting robust economic data out of the US. Not so robust, I'm afraid to say, in other parts of the world, the US continues to be roughly two thirds of the total value of global equity markets at the moment.
So what happens in the US really really matters for the broader investment opportunity set, and because of this sort of supportive economic data, expectations for profits for the upcoming quarter continue to be relatively robust. However, just to sort of end on a sort of, perhaps a little bit more of a circumspect note, we should as equity investors, keep an eye on what's going on in the bond markets because interest rates are beginning to drift up it seems like.
I mentioned the messaging from the US Federal Reserve, less inclined to cut interest rates, and expectations over the fourth quarter went from about three and a half cuts to today about one and a half. But that's really because of good news, because if the US economy is actually being stronger than expected, there's less need for interest rates cuts, so though you might not get lower interest rates, you might get higher profits. And that's probably going to be an okay sort of situation for investors.
It's really the rest of the world at the moment where we're seeing an unhappy coincidence of weaker economic growth and still some signs of rising discount rates. And that is something worth keeping an eye on, because the power of the discount rate to drive valuations in equity land, which is something that I think many investors will be paying close attention to as we head into 2025.
I hope that's been of interest, and I look forward to catching up with you again soon.