Market Overview Analysis by Charles-Henry Monchau covering: EUR/USD, USD/JPY, USD/CHF, S&P 500. Read Charles-Henry Monchau's latest article on Investing.com
We expect the Fed rate cut cycle to start soon and proceed gradually. Barring a financial crisis or a sharp and unexpected change in the path of, the upcoming rate-cutting cycle won’t be dramatic; we expect the Fed to make incremental, 25 bps cuts to its policy rate.
Throughout the summer, several of these stories have taken center stage. We see tangible signs of a slowdown in the global economy, such as the positive momentum from the beginning of the year in Europe and China fading away, and the US economy gradually cooling down, although the risk of recession remains quite low. Still in the US, recent indicators show that the labor market is cooling off but remains supportive of robust consumption growth.
The other market development has been the early signs of a market-style and sector rotation. Indeed, the 2023 and H1 2024 market darlings – the US mega-caps tech stocks – are struggling to regain their all-time highs. Meanwhile, theSo where do we go from here? As explained in a recent FOCUS note, it is possible to find the good, the bad, and the ugly sides in the current fundamental and technical backdrop.
Looking ahead, we speculate that the debate will center around: a) the pace of the earnings growth slowdown for large-cap tech, b) the sustainability of AI investment, and c) the realism of the sharp earnings acceleration. Regarding the third point, the sharp earning acceleration for the rest of the market is debatable to us. While there are some tailwinds such as lower inflationary pressure, a favourable base effect, and the prospect of lower interest rates, economic activity is not expected to accelerate meaningfully from here. Additionally, consensus earnings tend to be revised lower until the mid-year, so we should expect this negative revision process to unfold over the coming quarters for calendar 2025.
Regarding Fixed Income, we also made some minor rebalancing moves within portfolios. For instance, in a balanced account we reduced the underweight of High Yield bonds, while staying slightly underweight vs our SAA across all 4 currencies . The two changes mentioned above resulted in a cash increase, typically by around +1% in balanced accounts.
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