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The Big Three (May 2024)

1 . Stand and deliver

Over the past year the world’s largest stock market, the United States, has risen by more than 23%, with other markets posting more modest but still solid gains. This was driven by the rapid share price rises that can occur when the market realises a big recession has been avoided. Investors are willing to pay more for every £1 of earnings a company produces. However, this can only go on for so long and eventually those same investors demand to see the actual earnings from companies before they are willing to pay any more for the shares. This second phase is the stock market today. Investors are waiting to see real-world earnings growth for the rally to continue. So far, the big US earnings season has delivered good news on this front with 77% of companies posting faster earnings growth than had been anticipated. However, those companies that did not deliver, such as Facebook parent Meta and Tesla Motors, saw how quickly their price can fall at a time like this.


2 . The only way is down

Over recent months the US economy has shown incredible resilience, adding jobs and growing even as interest rates have stayed stubbornly high at 5.5%. The market has broadly accepted that interest rates will fall more slowly than had been hoped but that this is happening for the right reasons and so has made some slow progress despite this. At the end of April though investors took much solace from the words of the world’s most powerful central banker Jay Powell, the chair of the US Federal Reserve. After some very influential economists such as Obama’s Treasury Secretary Larry Summers suggested that interest rates may actually go up again, he was quick to slap this down. This will have proved great comfort to US President Biden who may have worried that a further interest rate hike could tip the balance of the coming election in favour of President Trump.



3 . The return of smaller companies

As the world moves into a period of further cuts in interest rates, earnings recovery and improving economic growth, the time could come again for smaller companies. These are always less able to weather the pain of high borrowing costs and so have struggled over the past three years. However, during the recovery phrase they can often be purchased at depressed prices and can be a vital tool for investors to ensure they are able to harness the stock market recovery. Our investors can expect to see portfolios gradually buying into smaller companies in the months ahead. Those investors who have agreed to higher levels of risk will see evidence of this first, with cautious investors seeing this implemented more gradually.

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