Two changes in the financial markets

Monetary easing will be less strong than expected and stock markets will become less concentrated. An unusual overlap.

We are currently witnessing a double development on the financial markets: monetary easing will be less strong than expected and stock markets are becoming less concentrated. In terms of monetary dynamics, market participants were firmly convinced that inflation could be overcome quickly, especially since the increase in food and energy costs had certainly led to an increase in wage demands, but not to a price-wage spiral.

Inflation in the United States has started to rise again, breaking the downward trend. In March 2024, inflation rose from 3.2% in February to 3.5% annually. Disinflation continued in the eurozone, but the underlying interest rate remains at 2.9% one year from now.

Risks continue to arise from wage developments, and the recent increase in oil prices to around $90 per barrel is another source of uncertainty. It is not easy for the ECB and the Fed to bring inflation below the medium-term target of 2%. As a result, key interest rates in the United States and the Eurozone will be cut between 2 and 3 times.

In the United States, the increase in the stock markets has become relatively greater. In Europe the concentration is less.

The concentration on the stock markets appears to be behind us. In the United States, the concentration of S&P500 index performance has continued into 2024, but some stocks have fallen (Tesla and Apple), others have continued to advance (Nvidia, Microsoft, Meta) and new ones have emerged (Eli Lilly , Broadcom). This means that the rise in the stock markets has become relatively broader.

In Europe the concentration is less. The main contributors to the Stoxx600 in 2024 are semiconductor manufacturer ASML, Danish pharmaceutical company Novo Nordisk and German software expert SAP. Companies such as LVMH, Shell and Unicredit are also among the top seven contributors in Europe.

For the investor, this means that the end of the Magnificent 7 wave is over and it is time to diversify further. This doesn’t mean we should divest from tech stocks. These benefit from digitalization and artificial intelligence. But in our opinion, other trends – for example changes in consumer behavior or innovations in healthcare and the pharmaceutical sector – will also strongly influence the financial markets.

Developments in the financial markets are returning, but it is unusual for two such changes to overlap in time. We therefore remain neutral on asset weighting and remain selective within the equity markets, favoring values ​​based on the economic model, the level of cash flow and the valuation of the companies.