Weekly market insights from CIO Thierry Hasse

Without major economic news that could have provided further information on the evolution of U.S. inflation trends, U.S. equity markets traded a new high last week, with the S&P 500 briefly touching 5,500.

Interest rates and inflation

Following the last Federal Open Market Committee meeting, where Federal Reserve officials signaled their intention to proceed with just one interest rate reduction in 2024, no fewer than seven policymakers urged the need to show patience before easing monetary policy during various speeches last week. The Fed’s interest rate decision was a sharp difference from the six cuts that were forecast by financial markets at year end 2023.

The Fed’s message was unanimous: they will need to observe several months of favorable inflation data in order to increase their confidence that the inflation reduction process in the U.S. is continuing towards their long-stated target of 2%. The entire monetary policy of the Federal Reserve is now essentially dependent on very short-term data, leaving the growing possibility of a policy mistake.

AI stocks continue surge

Driven by the dominance of artificial intelligence (AI) stocks seemingly making new highs on a daily basis, the S&P 500 touched 5,500 on Thursday before investors decided to book some profit ahead of “triple witching” (simultaneous expiration of stock options, stock index futures and stock index options contract) this Friday.

No other company is more emblematic of the AI technological revolution than NVIDIA (stock ticker: NVDA). However, one cannot help but note that this type of frenzy has happened before and that the semiconductor industry remains a cyclical business. Ask investors what they like about NVDA in particular, and most will reference the 170% year-to-date gain in its share price; very few will mention its next-generation Blackwell chips.

Political risk

Despite the upcoming elections in November, U.S. markets have largely focused on monetary policy. However, a quick look at developments in Europe during the past two weeks is a stark reminder of the potential for unanticipated political risk.

French President Emmanuel Macron swiftly dissolved the “Assemblée Nationale” (French equivalent of U.S. Congress) as allowed by the French Constitution and called for new elections for the end of June after the far-right “Rassemblement National” party decisively won election for the European Parliament on June 9.

This highly unanticipated political risk instantly created massive volatility, with the CAC 40, the benchmark for the French stock market, losing nearly 8% in a week’s time. This serves as a reminder that volatility can show up when least expected, and market participants need to be prepared.

Looking ahead

This week will bring the end of the quarter and the halfway mark for the annual performance of financial markets: we clearly know that stocks will beat bonds as the S&P 500 index is up ~14.3% year-to-date, and the U.S. Aggregate Bond Index is barely positive. The release of the Personal Consumption Expenditure Index on June 28, the Federal Reserve’s preferred measure of inflation, will be the most important economic indicator anticipated by financial market participants; however, we doubt it will close the debate on the evolution of inflation.

---

The information contained herein represents the views of Elevage Partners at a specific point in time and is based on information believed to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein In addition, there can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Any statement non-factual in nature constitutes only current opinion which is subject to change. These materials are provided for informational purposes only and do not constitute investment advice. Any reference to a security listed herein does not constitute a recommendation to buy, sell, or hold such security. Past performance is no guarantee of future results. The historical returns of any securities and/or sectors mentioned in this commentary are not necessarily indicative of their future performance.