Global stock markets have recorded their best first-quarter performance in five years, buoyed by hopes of a soft economic landing in the US and enthusiasm about artificial intelligence.
An MSCI index of worldwide stocks has gained 7.7 per cent this year, the most since 2019, with stocks outperforming bonds by the biggest margin in any quarter since 2020, even as traders scale back their expectations for rapid interest rate cuts.
The charge has been helped by the S&P 500, which has closed at a record high on 22 separate occasions during the quarter.
The AI boom has fuelled the market’s gains, with chip designer Nvidia adding more than $1tn in market value during the first three months of the year, equivalent to about one-fifth of the total gain for global stock markets over that period.
In the US, signs of resilient domestic growth have boosted stocks despite unexpected increases in inflation in January and February, which led investors to dial back expectations of as many as six interest rate cuts this year.
The markets now agree with the US Federal Reserve’s projection of three 0.25 percentage point cuts from the benchmark rate’s current 23-year high.
“This has been a pretty optimistic period in time,” said Kristina Hooper, chief global market strategist at Invesco. “We’ve also had some artificial intelligence excitement that has helped along the way, but this is a story about first and foremost monetary policy easing, and [second] a very resilient global economy.”
What began as a tech-driven rally on Wall Street gradually broadened out across the quarter, with equities in Europe and Japan beginning to outpace the US.
The UK’s FTSE 100, Germany’s Dax, France’s CAC 40 and Spain’s Ibex 35 all outperformed the S&P 500 in March, as the breakneck pace of Wall Street’s rally began to ease while global indices — and sectors beyond technology — caught up with earlier AI-driven gains in the US.
“The equity market is getting very enthusiastic and embracing an all-out rally,” said Florian Ielpo, head of macro at Lombard Odier Investment Managers.
Leading the pack among major markets is Japan, where growing confidence in the economy and rising prices for domestic chip-related stocks have driven a 16.2 per cent rally in the Topix in 2024, putting the index within touching distance of the all-time high it hit in 1989.
“All in all, we have achieved good disinflation without recession fears,” said Amelie Derambure, a portfolio manager at asset manager Amundi, which has increased its equity holdings, particularly in Japan and Europe but also in the US since the beginning of the year. “Weakness in the economy will probably not happen rapidly, so we still have some time to ride the current wave.”
The stock index gains have come even as government bond yields have risen, reflecting falling prices.
About two-thirds of those polled for Bank of America’s latest global fund manager survey do not expect a US recession over the next 12 months — up from just over 10 per cent at the start of 2023. For the first time in more than two years, the bulk of investors also expect global corporate profits to grow over the medium-term.
Surging asset prices also reflect investors’ growing appetite for risk. In a single day in January, Nvidia’s market capitalisation rose by about $277bn — roughly equivalent to the market value of every listed company in the Philippines, according to HSBC. A 60 per cent rally over the past three months, meanwhile, has pushed the total value of existing bitcoin above the gross domestic product of about 150 countries.
Similarly substantive gains for other risky assets have prompted some market watchers to compare the current rally with the dotcom bubble that burst dramatically in 2000.
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But BofA strategist Stephen Suttmeier suggested that given the duration of previous stock market rallies beginning in 1950 and 1980 that lasted 16 years and 20 years respectively, the current bull market, which began in 2013 “is middle-aged and can extend until 2029 to 2033”.
A sudden increase in US unemployment or a recession could yet blow the rally off course.
Kevin Gordon, senior investment strategist at Charles Schwab, said: “The Fed could find itself in a pickle if it starts lowering rates off the back of labour market weakness but higher inflation in January and February turn out not to be a blip.”