What Will Move Markets in the Second Half of the Year
Political noise rules in the short term, but keeping inflation and business results under control will be key.
The world’s major stock indices are reaching the 2024 meridian with attractive cumulative growth. But the change of semester will test the sustainability of the positive market bottom that has persisted since the end of last month. October, because several fronts of uncertainty remain open.
In the short term, investors will focus on French legislative electionsthe final result of which will be known after the second round on July 7. “Uncertainty is high, since the two coalitions with the greatest governing power, the radical right and the left, are proposing populist programs that could further increase France’s deficit and debt. So, what the new government passes on will determine the behavior of France’s stock markets in the summer, which could be very negative if investors do not like what they hear,” summarizes Juan J. Fernandez-Figares, director of IIC management at Link Securities.
If the political situation in France calms down, it is possible that the summer season on the markets will pass calmly, many experts believe. According to Natalia Aguirre, director of analysis at Renta 4, volatility may increase due to the electoral processes (elections are also taking place in UK, 4th July). But if you take into account the macroeconomics, it seems that investors will prefer to wait and see how the data goes, and they will be the ones “responsible” for monetary policy decisions.
“I expect little movement because it is likely that expectations will eventually consolidate, that the path of stability or lower inflation will continue and that the Fed has the option to consider a rate cut in September,” adds Julian Benavente, an analyst. CM Capital Markets. To do this, it will be necessary to confirm the recovery of the global economy in the coming months, Fernandez-Figares points out.
The focus will also be on the campaign to achieve business results in the first half of the year. “More than the numbers themselves, which I believe would have already been priced into the stock market, what is important is that they do not disappoint and leave room for the thought that the level of activity achieved in some sectors, especially technology, will be maintained in the second half the year, don’t puncture the ball,” says Benavente.
Bankinter analysts assure that “corporate results have been and will be at a high level, justifying the rise in stock markets in the context of falling rates.”
Support and risks
According to Aguirre, one form of support that stock markets could find is a reduction in the concentration of growth in a few assets/sectors. “To ensure the sustainability of growth and to facilitate new gains, it is necessary to rotate sectors with very good aggregate relative indicators (such as banking) to others that can benefit from the beginning of lower rates (utilities, real estate).”
In particular, the start of lowering interest rates ECBTaking the lead from the Fed could support an improvement in European stock market performance, political uncertainty aside, and a relative improvement in small-cap stocks, Aguirre said.
Among the risks for stocks, analysts cite a possible further adjustment in the market’s rate cut expectations if inflation does not fall further, the European economy does not recover and the US economy slows excessively. There are also concerns about geopolitical risks, which could have a bullish impact on inflation. “The conflicts in Ukraine and Gaza are still there. Uncertainty is embedded but hidden, which as a background condition could also have an impact,” concludes Benavente.