Global stock markets have recorded robust performance in the first quarter of the year, with the MSCI index of worldwide stocks posting a 7.7% gain, marking the largest increase since 2019. This surge has been primarily fueled by positive sentiment surrounding the US economy and the rapid advancements in artificial intelligence technology. The S&P 500 index has been a key contributor to the market rally, achieving record-high closings on 22 occasions throughout the quarter. Additionally, the emergence of chip designer Nvidia as a market leader has significantly bolstered market gains, with Nvidia alone adding over $1 trillion in market value in the initial three months of the year.
Despite concerns over inflation spikes observed in January and February, the strength of the US domestic economic growth has provided a solid foundation for stock market performance. Consequently, investors have adjusted their expectations regarding interest rate cuts to align with the US Federal Reserve’s forecast of three 0.25 percentage point reductions.
The market rally, which initially commenced in the tech sector on Wall Street, has gradually expanded to encompass European and Japanese markets. Equities in these regions have begun to outpace those in the US, evident through the outperformance of indices like the FTSE 100, Dax, CAC 40, and Ibex 35 when compared to the S&P 500. This indicates a notable diversification of market gains beyond technology-driven sectors.
Japan stands out as a market leader in this trend, with growing economic confidence and escalating prices of local chip-related stocks propelling a 16.2% rally in the Topix index so far this year, bringing it within striking distance of its all-time high from 1989.
While stock indexes have seen significant increases, government bond yields have concurrently risen, leading to declining bond prices. However, results from a Bank of America survey suggest that a US recession over the next 12 months is not widely anticipated by surveyed individuals. Moreover, there is an emerging optimism regarding global corporate profit growth in the medium term, marking a shift with positive implications for the market outlook.
The escalating asset prices are indicative of an increasing risk appetite among investors. Notably, Nvidia’s substantial market capitalization surge in January alone was comparable to the total market value of all listed companies in the Philippines. Furthermore, the notable performance of other high-risk assets such as Bitcoin has sparked comparisons to the dotcom bubble of 2000 among some market analysts.
Nonetheless, Stephen Suttmeier, a strategist at Bank of America, contends that the ongoing bull market, which originated in 2013, still harbors room for growth until the period between 2029 and 2033. Drawing parallels with historical stock market rallies lasting 16 and 20 years, Suttmeier suggests that the current bull market is situated in its intermediate phase.
However, the rally remains vulnerable to potential disruptions, such as a sudden surge in US unemployment or an economic downturn. Challenges may arise for the US Federal Reserve in the context of lowering rates due to labor market weakness combined with heightened inflation levels recorded in January and February.
