How can we explain the record highs in the stock and cryptocurrency markets?
The stock and cryptocurrency markets have reached record highs in recent weeks. Eric Bleines, CEO of Swiss Life Private Wealth Management, provides an update on market trends.
Stock markets have reached record highs in recent weeks
Despite a challenging geopolitical environment and an economic slowdown in Europe, stock markets are posting impressive gains. In fact, Japan’s Nikkei has gained 17% since the start of the year, the EuroStoxx 7.8%, the Nasdaq 7.2%, and the CAC 40 5.1%. These gains reflect particularly strong earnings reports in recent weeks, which have exceeded market expectations. This is particularly true in the United States, where three-quarters of companies have positively surprised investors, with upward revisions to earnings growth averaging 8%. These positive surprises have been rarer and less significant in Europe, particularly among small- and mid-cap stocks. As a result, it has been the large-cap luxury and, above all, technology stocks that have driven the market, while sectors such as real estate—which is suffering from high interest rates—and commodities—weighed down by the slowdown in China—have been in the red since the start of the year. This stock market rally is therefore highly concentrated.
How can we analyze these dynamics surrounding technology?
The markets view generative artificial intelligence (AI) as a powerful investment theme, and the exceptional results posted by certain technology companies—both in terms of revenue and margins—not only prove them right but even manage to surprise them. The U.S. microprocessor manufacturer Nvidia announced a 286% year-over-year jump in net income to $12.3 billion, and its order book continues to fill up!
Generative AI is a profound technological revolution that is spreading throughout the economy. It is benefiting certain microprocessor manufacturers such as Nvidia and ASML, but not Infineon or STMicroelectronics, which are primarily focused on traditional industries. It is also driving growth for other companies that are using it to develop new applications, such as the GAFAM companies in the United States, as well as CapGemini, Publicis, and SAP in Europe.
What is the macroeconomic context of this stock market rally?
Inflation continues to slow, albeit at a slower pace as we approach the 2% target. More surprisingly, growth forecasts for the United States have been significantly revised upward since the beginning of the year: U.S. GDP is now expected to grow by 2% in 2024 (up from +1.3% previously), thanks to robust consumer spending driven in particular by moderating energy prices and a massive reindustrialization effort linked to investments under the Inflation Reduction Act.
This resilience reduces the need for the Fed to cut its policy rates quickly, a fact that the markets have already priced in: sovereign yields have risen 0.30% since the start of the year, tempering the enthusiasm seen at the end of 2023. Given its weak growth, the ECB, for its part, would have more reason to cut its short-term rates, but it will likely not do so before the Fed, so as not to weaken the euro.
