A large portion of the momentum seen in the equity markets has been generated from the US equity markets, with a disproportionate amount of US returns coming from the ‘magnificent seven’ mega-cap technology stocks, which surged throughout 2023.
The star performer of this group has been Nvidia, propelled by the explosion in prominence of artificial intelligence. This meant that all eyes were on Nvidia when they reported earnings this month, as a sentiment indicator of whether we could see momentum in the equity markets continue. Nvidia did not disappoint with strong earnings, showing a 265% growth in revenue and a 769% growth in net income, sending Nvidia shares surging once again, capping off another great month in the equity markets with the trends present in January repeating themselves again.
Much like January and most of 2023, the best performance in developed markets was to be found in the US and Japan. Japanese equities have strongly carried through their 2023 momentum into the new year with another stellar month, which saw the Nikkei 225 index surge over 8% as of February 28th, finally surpassing its 1989 record high in the process. Unsurprisingly, given Nvidia’s strong earnings report, the US indexes also climbed in February, with the tech-heavy NASDAQ index up over 5% and the S&P500 rising just under 5% as of February 28th. The STOXX Europe 600 also reported a positive February, climbing just under 2%. However, once again, the FTSE100 lagged its peers and was flat for the month, down 3.22% over the last year in a period in which global equity indexes have soared.
February saw a pessimistic turn in the outlook for interest rate cuts, as a resilient US economy handed the Federal Reserve the flexibility to keep rates at elevated levels for longer than investors had previously forecasted. Markets are now pricing in three interest cuts in 2024, a huge shift in sentiment from the previous consensus forecasts of six interest rate cuts. Comments made at the Federal Reserve’s last meeting indicated that Jerome Powell would want to see more data on inflation before committing to rate cuts. Additionally, the continued resilience of the US economy and improving forecasts for future performance mean there is less urgency to pivot to cutting rates. The outlook in the UK and Eurzone is different, with their respective economies not keeping pace with the US, meaning we could see interest rates cut earlier to relieve pressure on beleaguered economies. Signs of economic strain were present in February, with it revealed that the UK had slipped into recession in the second half of 2023 and major Eurozone economies such as Germany and France continue to sputter.
The revised forecasts for interest rate cuts saw bond yields climb after a 3-month skid. Yields on US 10-year treasuries began the month at 3.97% but stood at 4.29% as of February 28th, providing bond investors with additional time to lock in higher rates ahead of projected interest rate cuts. Similarly, 10-year rates in the UK rose sharply in February, signalling the pessimistic outlook on rate cuts regardless of the slowing economy.
While investors would have been hoping for rate cuts to be arriving sooner and in the higher frequencies that had been previously forecasted, these concerns can be overlooked given that the world’s equity markets continue to march onwards to new highs on the back of a strong 2023. The MSCI World Index increased by over 4% in February as of February 28th, marking months in a row of positive gains. We hope to see this trend continue as 2024 progresses, and the impending interest rate cuts could provide further fuel to the fire when they arrive.
Our February Blogs and Article Focus
This month’s newsletter covers a couple of subjects: Private Banking in Dubai and a Case Study: £25M Debt Facility GSB Private Finance.