02/12/2024

The global stock markets continued to showcase their impressive upward trend without slowing. In the United States, a good corporate earnings season continues to drive investor optimism, in a context where the likelihood that the economy will experience a “soft landing” has gone up.

The S&P 500 index managed to top the 5000-point mark for the first time in its history. The performance of the American index is extraordinary, no matter how you look at it: we hadn't seen a streak of 14 bullish weeks out of 15 since 1972, and the “momentum” investment style is posting its best start to the year since 2013. The strength is obvious even in the daily market trends, since out of the 28 sessions so far in 2024, the S&P 500 has closed above the average daily price 71% of the time. Of course, the constant rise in share prices poses the increasing risk of a correction. In this regard, the technical overbuying of the main indices is very significant, and we will see profit taking at some point. The big question here is whether buyers will make a comeback when the time comes, since investors are now quite overweight in stocks. Our expectation is that any dip will be bought again, as long as the narrative of a soft economic landing holds. The expectations generated by AI continue to be the driver for the bulls, and the "Magnificent Seven" once again led the week in the US market. NVIDIA continues to be the great beneficiary, and will report its earnings on February 21. The stock is up over 40% this year, and over 215% in the last 12 months. The negative part of all this is that the market's breadth has again fallen dangerously low. Take as an example the small-cap stocks, whose performance is more sensitive to internal economic growth: the Russell 2000 index has fallen by approximately 1% this year, and stands 20% below its maximum of 2021. The indicator is 8 percentage points behind the Nasdaq so far this year. Meanwhile, the concerns over credit are back, as the evidence indicates that the Fed will take longer to lower interest rates. As a result, regional banks are once again the market's focus of attention, following the problems reported by NYCB.

In Europe, although the earnings reporting season is proving to be disappointing, the equity markets followed in the wake of the American markets and again closed with weekly gains of more than 1%. The Eurostoxx 50 index reached new highs since 2001, closing up for the third consecutive week. The technology and discretionary consumption sectors clearly led the week in Europe's markets, while electricity and real estate companies suffered significant weekly falls. Similarly, the Spanish market exhibited a worse relative performance.

With its New Year on the horizon, the Chinese stock market was one of the week's leading players after officials decided to give strong support to their markets, which were seeing very low price levels. This support reflected positively in the stock prices, although how long these prices and investor confidence will persist could depend on announcements of new economic stimuli intended to significantly prop up its real estate sector.

Meanwhile, the Japanese market continued to climb towards the highs it reached 35 years ago, and closed out the week with increases of 2%, driven by the weak yen. Finally, emerging markets continued to show a worse relative performance, which in the past week was reflected in drops in the Eastern European and Latin American markets.

To conclude, and focusing now on the fundamentals, things are the same as they have been recently, although we have safely cleared the hurdle of the revised 2023 CPI figures, which last year generated many uncertainties about the process of deflation. Meanwhile, global equity markets have continued to rise unabated, which is making a short-term consolidation process more likely, given the accumulated technical overbuying. In any case, we do not see any fundamental reason to change our constructive position, and we think that as long as the current narrative of a soft economic landing remains substantially changed, any correction will be seen as a buying opportunity by investors.