Chart of the Week: Not Over Yet

We were fortunate to be part of a client’s recent 10-year anniversary celebrations. It was terrific to see their success and witness the strong team culture they've built over the years – something I’m personally passionate about. Reflecting on milestones like this reminds us how important it is to take stock of progress before moving forward, whether in life or in investing.

Speaking of anniversaries, another one was reached recently – two years of the current global equity bull market. Born in October 2022, this rally has defied expectations, particularly in light of interest rates that have remained almost unchanged during this time. Unlike typical ‘early-cycle’ rallies driven by lower rates, this market has seen ‘growth’ companies outperform ‘value’ stocks, large caps outshine small caps and US equities outperform the rest of the world.

Despite these atypical characteristics, the market continues to flourish, and we expect a third year of gains. Several factors support this view: an expectation of further rate cuts by the Fed, a healthy US economy and continued corporate earnings growth. In our view, these drivers outweigh concerns over geopolitical tensions, uneven global growth and the upcoming US election.

History too tells us that a third year of equity market gains is likely. Since 1928, two-year bull markets after a loss-making year have extended into a third year of gains 80% of the time. The chart below helps to illustrate this point.

In the current bull market, only chipmaker Nvidia, Facebook parent Meta and another chipmaker, Broadcom, have outperformed in both years. Interestingly, in the second year, tech giants like Apple, Microsoft and Alphabet have underperformed. This highlights how the rally has broadened out beyond Big Tech, as confidence in the US economy has grown.

We remain optimistic about US equities, especially given America’s longstanding track record of innovation and profitability. Chinese stocks may offer an intriguing trade, but the risks remain high. Within US equities, we favour technology and cyclicals, and believe small caps have room to catch up.

Key Takeaway: Whether celebrating a personal milestone or one in markets, it’s essential to pause, reflect and appreciate the progress made before moving forward.

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This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.