Inflation slows AI soars: Unpacking Q2’s key market themes

July 2nd 2024

Executive summary:

• The Magnificent Seven group of stocks turned in another stellar performance, rising nearly 18% during Q2
• French stocks sold off ahead of the country’s parliamentary elections
• We believe it’s more likely than not that the U.S. economy can achieve a soft landing

On the latest edition of Market Week in Review, Senior Director and Chief Investment Strategist for North America, Paul Eitelman, and Regional Director for North America Advisor & Intermediary Solutions, Lam Guluka, discussed key market themes from the second quarter. They also chatted about the potential market impacts of upcoming elections in the U.S. and France, and finished with an overview of Russell Investments’ recently released Q3 Global Market Outlook.

AI enthusiasm powers Q2 market strength

Guluka and Eitelman started off by unpacking the main market drivers from the April-through-June period. Eitelman said that artificial intelligence (AI) was a key theme for equity markets during the quarter, with strong returns from mega cap tech names propelling the U.S. stock market to record highs the past few months. He noted that as of market close on 27 June , the Magnificent Seven group of stocks was up nearly 18% on the quarter—a performance Eitelman characterised as phenomenal.

In contrast, the remaining 493 companies in the S&P 500® Index—or the S&P 493—were down a collective 1% on the quarter, he remarked. “This large divergence and spread within the U.S. equity market can really be chalked up to excitement around AI,” Eitelman stated. He added that similar themes played out beyond the U.S., such as in emerging markets, where a strong second-quarter performance was largely powered by gains from semiconductor-producer TSMC.

Turning to bond markets, Eitelman said the second quarter was a bit of a mixed bag, with bond yields rising rapidly during the first few weeks of April on the back of strong economic data and hot inflation readings. Since then, however, yields have fallen sharply amid signs of slower economic growth and a cooldown in inflation, he said. 

The end result? Yields were roughly flat on the quarter, Eitelman remarked, pointing to the U.S., where the yield on the benchmark 10-year Treasury note stood at roughly 4.3% at market close on 27 June . “That’s very close to where the 10-year stood on April 1—the first trading day of the second quarter,” he remarked, calling the quarter a bit of a rollercoaster ride for fixed income markets.

French stocks sell off as elections loom

Guluka and Eitelman shifted gears to politics, with Guluka noting that elections are approaching in several key developed markets, including the UK, France, and the U.S.

Eitelman said the November U.S. elections haven’t had much of an impact on financial markets so far—partly because the elections are still four months away and also because several of the contests appear incredibly close. “Until the calendar gets closer to Labour Day, I don’t expect markets to have enough information to start sniffing out which way some of these races could break, including the race for the White House and key seats in Congress,” he stated.

By contrast, the upcoming parliamentary elections in France are having much more of an impact on global markets, Eitelman noted. He explained that Marine Le Pen’s National Rally party is polling very strongly heading into the country’s first round of elections on 30 June , which has led to a selloff in French stocks relative to their European counterparts. Eitelman added that the spread between French and German government bonds has also widened significantly.

“It’s pretty clear that we’re seeing a bit of a risk aversion and anxiety trade happening in Europe around how the French elections may unfold,” he remarked, noting that the first round of voting will take place on 30 June and the second round on 7 July.

At a broader level, Eitelman stressed the importance of remaining calm and disciplined during election season, noting that U.S. equity markets typically do well in election years regardless of the outcome in November. “A look at our data, which goes back several decades, shows that investors have a tendency to move into cash during election years—and this can actually harm portfolio performance. We believe that staying invested and trying to be unemotional with your investment decisions during this time period is vital to achieving success over the long term,” he stated.

Is a soft landing more likely for the U.S. economy?

Guluka and Eitelman wrapped up with an overview of Russell Investments’ recently published Q3 Global Market Outlook, which details the strategist team’s views on global economies and markets in the months ahead. Eitelman explained that the latest edition, published 25 June , outlines the three possible outcomes for the U.S. economy—a reacceleration or no landing, a soft landing, or a hard landing (i.e., a recession).

“As a baseline, we think it’s a little more likely than not that the U.S. avoids a recession in the year ahead—but there are some key areas of risk and uncertainty around this viewpoint, including the impacts of high borrowing costs,” Eitelman stated, encouraging readers to download the full report for the complete insights.

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Source: Russel Investments

Important note: Market Week in Review is a weekly market update on global investment news in a quick five-minute video format. It gives you easy access to some of our top investment strategists. Watch every Friday, and our experts will keep you informed of key market events and provide you with an easy-to-understand outlook on the week ahead. Join industry leaders Erik Ristuben, Paul Eitelman, Adam Goff, Mark Eibel, and other industry-leading experts.