US stock markets have been powered by investors’ continued enthusiasm for artificial intelligence (AI). However, July showed that cautionary signals remain. Questions are being asked about when companies are going to generate positive returns from the significant investments made to support AI technology.
Amid this backdrop, the political landscape added an unexpected twist. Concerns about President Biden’s mental health, coupled with an attempted assassination of Donald Trump, sparked renewed speculation about a potential Trump victory in the upcoming US election. This speculation triggered what has been termed the ‘Trump trade’, where investors rotated out of high-flying tech stocks into smaller companies and undervalued sectors. The market’s response reflected expectations that Trump’s economic policies might favour domestic industries and potentially introduce inflationary pressures.
Beyond the US, markets recorded solid gains across various regions and sectors, underscoring a key theme of broadening earnings growth. Resilient consumer spending, buoyed by wage growth outpacing inflation, has been a significant driver and suggests growth is no longer confined to just one sector or region.
A major factor contributing to improved market sentiment has been the predicted shift in central bank interest rate policies. Markets have shown time and again how sensitive they are on this subject, and while the path ahead may include some volatility, the overall outlook is positive. If companies can continue to improve margins and sustain earnings growth, equity markets are likely to see continued gains despite the occasional speed bump along the way.
Given these dynamics, we are keeping a balanced approach in our portfolios, staying close to our long-term strategic allocations. This balance includes both cyclical and defensive sectors, together with exposure to key investment themes like AI and the energy transition. We’ve also increased our use of market index trackers which helps reduce costs.
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