Equity markets powered ahead and rates remained high in the first half of 2024

Two key trends stand out in the first six months of 2024 in the markets: the continued growth of risky assets and interest rates remaining high.

Artificial intelligence boom powers global equity markets

The global equity index (MSCI World in euros) surged by 15% over the first six months of the year. Once again, AI stocks fuelled growth in the market, reflected in the clear outperformance of the technology sector. Up more than 150%, chip-maker Nvidia’s stock continued to soar. The semiconductor giant has single-handedly contributed over 3% to the performance of the global equity index over the first half of the year.

The US market is highly concentrated with Nvidia, Microsoft, Alphabet and Apple now commanding some 25% of the S&P 500. But does this steep increase in concentration point to a 1990s-style speculative bubble?

In our opinion, the current situation is very different. Valuations are not overblown as the earnings of most of the world's leading technology companies are growing significantly. The downside risk lies more in whether this earnings growth can be sustained, particularly if demand for artificial intelligence weakens, something that cannot be ruled out.

Surprisingly, higher-for-longer rates – generally not favourable to risky assets – have not dampened the rally in equity markets.

Changed outlook for interest rate cuts

Rate cut expectations have been pared back sharply in recent months as both the European Central Bank and the US Federal Reserve opt to keep short-term rates high.

In June, the ECB took the first step towards easing its monetary policy and cut its key rate by 25 basis points (0.25%) – the first reduction since 2019. However, we expect a very gradual pace of easing, with a further rate cut of 0.25% likely by the end of 2024.

Turning to the US, markets now expect borrowing costs to be scaled back by around 0.5% over the year as a whole. But signs of a slowdown in consumer spending and a weaker housing market could prompt the Fed to make its first rate cut in the coming months, despite being in the thick of an election campaign.

Resurgent political risk

On the bond yield front, German and US 10-year yields have risen by more than 0.3% since the start of the year. However, the end of the first half saw renewed appetite for investment-grade debt, on the back of resurgent political risk in the euro area.

Risk premiums on French assets shot up as a result of President Macron’s decision to dissolve parliament and call a snap election after the results of the European parliament elections. The spread between France and Germany’s 10-year bond yields has widened to its highest level since 2012. Opinion polls underscore the risk that one or more populist parties could win the most votes and dominate the new French parliament, a development that would significantly reduce the likelihood of implementing the reforms needed to reduce France’s public debt, which is currently at over 5% of GDP. We will continue to closely monitor the political situation in the country, its impact on the real economy and its potential to increase the cost of French government debt.