The European Central Bank has started to cut interest rates, but the US Federal Reserve did not, while the S&P 500 and Nasdaq set new all-time highs, led by semiconductor stocks.
But we are starting to see the beginning of a stock market rotation as the hopes that the Fed will start its long awaited cuts in interest rates, grows. Investors have been preparing for this but many still wonder what comes next for their portfolio, writes eToro analyst for Romania, Bogdan Maioreanu.
Last quarter was a good one, with all-time highs for US indexes while Nvidia reached a market capitalization of $3 trillion and briefly surpassed Apple and Microsoft to become the world’s largest market capitalization stock. One of the reasons for this was the increased spending on data centers especially by companies developing artificial intelligence products. Last but not least, the European Central Bank and the US Federal Reserve have diverged on interest rate cuts. The Fed kept rates unchanged on persistent inflation (PCE at 2.7%) and continued government and consumer spending. But the ECB cut its deposit rate by 0.25% to 3.75%.
In this context, investors are asking themselves what will happen next with the key interest rates, how fast and how low will they drop? In June, eurozone inflation fell to 2.5% year-on-year, while core inflation remained unchanged at 2.9%. The current key interest rate is 4.25%, which offers scope for further interest rate cuts. Recently, the ECB has been cryptic about its interest rate trajectory but aims not to surprise the markets. Its president, Christine Lagarde could potentially prepare the market for a rate cut in September or October at her press conference on Thursday.
The Q3 has some elements that are starting to show. The Fed is slowly but surely going to the first cut. So far the market sees three cuts this year with an 88% probability of the first one of 0.25% being in September. But investors are starting to reposition. Last week, we saw the beginning of a rotation that we anticipated and had been long overdue. The small-cap Russell 2000 Index gained 6%, while the technology-driven Nasdaq 100 Index shed 0.3%. The trigger turned out to be the new US CPI number for June, which came in at a soft -0.1%, whereas the consensus had expected +0.1%. Bond yields went down, the US dollar weakened to 1.09 against the euro, and gold reached the $2,400 level again. The equity market rally broadened as tech stocks were sold, but 84% of all NYSE-listed shares went up, led by the real estate and utility sectors. The estimates of an average of 9% profit increase in the Q2 earnings reports is continuing to sustain some stocks valuations but investors should also be prepared for corrections that are natural in any market cycle.
Romanian investors are preparing for the market moves with half of them (50%) declaring that they will increase their portfolio size in this quarter while 47% will keep its current value, according to the latest eToro Retail Investor Beat survey. Only 3% said that their portfolio value will decrease.
About the poll
The latest Retail Investor Beat was based on a survey of 10,000 retail investors across 12 countries and 3 continents. The following countries had 1,000 respondents: UK, US, Germany, France, Australia, Italy and Spain. The following countries had 600 respondents: Netherlands, Denmark, Poland, Romania, and the Czech Republic.
The survey was conducted from 15 May – 5 June 2024 and carried out by research company Opinium. Retail investors were defined as self-directed or advised and had to hold at least one investment product including shares, bonds, funds, investment ISAs or equivalent. They did not need to be eToro users.
About eToro
eToro is a trading and investment platform that empowers people to grow their knowledge and wealth as part of a global community of investors. eToro was founded in 2007 with the vision of opening up the global markets so that everyone can trade and invest in a simple and transparent way. Today, eToro is a global community of more than 35 million registered users who share their investment strategies; and anyone can follow the approaches of those who have been the most successful. Due to the simplicity of the platform users can easily buy, hold and sell assets, monitor their portfolio in real time, and transact whenever they want.
