US equities have gone on a remarkable run since last October, leaving the FTSE 100 and other British markets lagging behind.
After eking out a small positive performance this week, the S&P 500 has now climbed in 16 of the last 18 weeks, the first time this has happened since 1971.
It has climbed 29 per cent over the past 12 months and 7.5 per cent year-to-date. “We are in rarefied air in terms of the relentless risk rally since the end of October,” Deutsche Bank’s Jim Reid said.
The S&P 500’s remarkable run mainly stems from bets that the Fed will start cutting interest rates in 2024.
Although markets expect fewer rate cuts now than at the beginning of this year, traders are banking on interest rate cuts starting this summer. According to CME’s Fedwatch tool, there is a 53 per cent chance the Fed will cut rates in June.
Interest rates stand at a 23-year high after the Fed’s aggressive hiking campaign in 2022 and 2023, yet the US economy has actually grown faster than the year before.
The unexpectedly strong performance of the US economy has emboldened investors.
“The US economy is proving to be more resilient than expected and so investors have been taking tentative steps to look at areas of the market that were previously sold off,” Dan Coatsworth, investment analyst at AJ Bell said.
The strong performance of the S&P 500 also reflects the dominance of so-called Magnificent Seven tech stocks – such as Nvidia, Meta and Alphabet – which have driven a large part of the rally.
“Investors are riding the AI bandwagon and are sticking to the big names which have already demonstrated strong growth thanks to this vibrant theme,” Dan Coatsworth, investment analyst at AJ Bell.
Henry Allen, a strategist at Deutsche Bank, agreed: “The current equity rally is very narrow by historical standards”.
UK markets, by contrast, have struggled. The FTSE 100 has increased in nine of the past 17 weeks while the FTSE 250 has only increased in eight. Over the past year, both have struggled to break even.
London’s FTSE indexes have struggled to join the AI rally given the lack of tech stocks. “The UK market is woefully under-represented in technology and instead tends to be driven by financials and natural resources,” Coatsworth said.
Both of these sectors have struggled in the past year.
Also, the economy has struggled more broadly, with the UK slipping into a shallow recession in the second half of last year. Economists expect UK growth to lag the US again this year.
“It’s no wonder that investors are increasingly interested in overseas markets under these circumstances,” Coatsworth said.