Investor optimism resists the challenges of a worse macroeconomic week
Roberto Hernanz, Markets Director at BBVA Private Banking.

02/19/2024

More than the economy, the global equity markets have been showing great resilience, this week marking their sixth consecutive week of gains (15 in the last 16 weeks), despite the worrying macroeconomic data that was published and reflected an acceleration in inflation in the United States and, in the best case, stagnation in the rest of the advanced economies.

However, the S&P 500 could not match the MSCI World's bullish trend and ended up falling by 0.4% on a monthly basis. Yet the index was surprisingly strong, taking into account the market's radical easing of expectations regarding Fed rate cuts. What are the reasons for this strength? Once again, the boom in artificial intelligence is the main answer to this question. In recent days, companies leading the expansion of this technology have shown extraordinary performance, to the point that Nvidia currently accounts for more than 35% of the S&P 500's total capital gain in 2024. Another reason for the strength of the market is the campaign to present business results. In the United States, 78.6% of the S&P 500 companies have now published, with the index offering positive surprises in terms of the average earnings per share and sales. However, the index's year-on-year rise of 7% in earnings per share is considerably more than the consensus forecasts before the campaign. On the other hand, the recovery of equities implies that the inflation data from last Tuesday does not mean a change in the downward trend of the last year and a half and that it responds to transitory factors. Thus, the narrative of a soft economic landing remains in force among investors, supporting the global equity markets. Similarly, the investor position has been gradually improving and, over the last four weeks, almost $60 billion has flowed into global stock funds and ETFs, the most since February 2022.

However, the sector performance of the American market did take into account the expectations of fewer rate cuts by the Fed, and "growth" sectors, such as technology, communication services and consumer discretionary, showed a worse relative evolution. On the other hand, oil companies, raw materials and financial companies occupied the top positions of the sector ranking. Among the Magnificent Seven, only Nvidia and Tesla were able to close the week with gains. On the other hand, the Russell 2000 small-cap index recovered for the second consecutive week, which contributed to improving the market's breadth.

As for the European market, it had its fourth consecutive week of gains and the Eurostoxx 50 closed at its highest price since 2021. The markets in France and Italy showed a better relative performance, while the Spanish stock exchange was lagging behind for the second consecutive week, despite the strength of the financial sector, which, together with that of raw materials and industrial, led last week's European stock market session.

In Asia and in terms of the Japanese market, it continued to climb towards the area of historic highs and recovered more than 4% weekly. At this time, the Nikkei 225 index stands within 1% of its all-time highs on December 29, 1989, when it closed at 38,915.87 points. This week we do not have the continental China reference, which remained closed for the Lunar New Year, although the Hong Kong market ended the week with strong increases, in the expectation of greater economic stimuli and good Chinese consumption data recorded during the holiday period. This greater optimism was also reflected in the emerging Asian markets, which closed the week with increases of more than 2.5%.

In the short term, we believe that January's macroeconomic data that we have recently seen does not mark a turning point in the soft economic landing narrative, which we believe remains the most likely macroeconomic scenario for 2024. Unless there is a substantial acceleration in monthly inflation or we have data suggesting a slump in economic activity, markets should continue to show good performance. Therefore, we have another week with a constructive position, aware that the likelihood of a correction in the short term remains high, which should be bought back by investors provided that the current market narrative is maintained.