In the first half of this year, external conditions were initially a drag due to the conflict in the Middle East. However, driven by AI-related investments and the subsequent signing of a ceasefire memorandum between the US and Iran later in the period, the stock markets of the US, Europe, and Japan generally trended upward.
From the start of the year through June 30th, the US Nasdaq Composite, S&P 500, and Dow Jones Industrial Average indices rose approximately 11%, 8.7%, and 8.6% respectively. The Philadelphia Semiconductor Index surged even more dramatically, gaining about 101.1%. Japan's Nikkei 225 index increased by roughly 39%. Among major European markets, the UK's FTSE 100, France's CAC 40, and Germany's DAX 30 rose approximately 5.7%, 3.1%, and 2% respectively.
Examining the drivers of these gains, sectors such as memory chips, semiconductor equipment, AI computing power, and cloud computing propelled the US market higher. European stock performances were relatively muted, lacking a clear, dominant theme for their advance. The Nikkei 225's rise, which outpaced the underlying performance of the Japanese economy, was fueled by the boom in the AI semiconductor supply chain and the benefits of moderate inflation.
Looking ahead to the second half of the year, financial institutions are expressing a cautiously optimistic outlook for these markets. The general forecast is for a period of consolidation or volatility in the third quarter, with a potential recovery anticipated in the fourth quarter.
Outlook for the US Market
Specifically, the US stock market is expected to experience volatile upward movement, but with significantly amplified fluctuations. Institutions widely anticipate a phase of high-level consolidation and increased volatility, particularly in Q3, before a potential choppy uptrend emerges in Q4. Regarding the S&P 500, both Morgan Stanley and Goldman Sachs project it could reach 8000 points by year-end, implying a gain of about 6.7% for the second half. They expect the AI industry chain to contribute nearly half of the profit growth. Other institutions like JPMorgan Chase, S&P Global, and Nomura are more cautious, forecasting a range between 7500 and 7800 points.
Analysts identify key risk factors for US equities as the persistent stickiness of core inflation, a potentially significant delay in the Federal Reserve's interest rate cuts, policy uncertainty stemming from the US midterm elections, market valuations sitting at historically high percentiles (around the 88th percentile), and geopolitical conflicts disrupting oil prices. Supporting factors are expected to include the continued materialization of capital expenditure in AI computing, consistently strong earnings reports from technology companies, and the prospect of the economy achieving a soft landing.
Prospects for European Markets
Institutions also believe European stocks may follow a slow, recovery-driven bull market in the second half, potentially outperforming their US counterparts. The primary reason cited is that European equities' forward price-to-earnings ratios are significantly lower than those in the US. However, European Central Bank monetary policy is seen as the core variable influencing the market and the point of greatest divergence among forecasters. Most institutions expect the ECB to hold interest rates steady, with Eurozone core inflation slowly receding, and no rate cuts anticipated until 2027. Some analysts, however, warn that if rebounding energy prices push inflation higher, the ECB could hike rates by another 25 basis points in Q4, which would temporarily pressure European stock valuations.
Analysts point out that other major risks facing European markets in the coming months include a weaker-than-expected recovery in Eurozone industrial activity, geopolitical risks impacting energy supply, and fiscal deficits putting pressure on national budgets.
Japanese Market Dynamics
While Japanese stock performance has notably diverged from the country's economic fundamentals, institutions still see structural opportunities in the second half. They predict that the Bank of Japan's recent interest rate hike will be a short-term negative. However, over the medium to long term, ending the negative interest rate policy should help repair banks' net interest margins and improve the profitability of the financial sector. Key risks for the Japanese market in H2 include a sharp appreciation of the yen squeezing export profits, rebounding inflation forcing the central bank to hike rates further, and a global slowdown in technology capital expenditure.
Overall, there is no systemic bear market risk identified for the US, European, and Japanese stock markets in the second half of 2024. Market movements are expected to be structurally differentiated, with range-bound fluctuations likely becoming the dominant theme. Common downside risks across all three major markets, according to institutions, include: renewed Middle East geopolitical conflicts causing another sharp spike in oil prices, which would elevate global inflation and force central banks to maintain high interest rates; a resurgence of core inflation in the US reviving expectations for Fed rate hikes; global AI capital expenditure falling short of expectations, leading to downward revisions in tech company earnings; and economic performance weakening more than anticipated.
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