Tech Stocks Lead Market Surge Amid Economic Uncertainty: July 2024 Analysis

US Equity Market Performance

In July 2024, the US equity markets continued their robust rally, driven predominantly by large-capitalization information technology companies. The S&P 500 index surged by 5% month-over-month (MoM) and the Nasdaq 100 index rose by 8.4% MoM. However, this rally was not broad-based, as the median stock on the S&P 500 increased by just 0.5% MoM and the median stock on the Nasdaq 100 rose by 3.4% MoM. The Dow Jones index, which includes Microsoft, Apple, and Amazon but excludes companies like NVIDIA, Alphabet, Meta Platforms, and Tesla, rose by only 2.2% MoM. The Russell 2000 index, representing smaller companies, saw a modest increase of 1% MoM.

Global Equity Markets

The US technology sector's rally also influenced global equity indices. The MSCI World (ex-US) index increased by 1.5% MoM, while European markets faced political uncertainties due to elections in France and the United Kingdom. The Euro STOXX 50 index remained unchanged, the FTSE 100 fell by 0.4% MoM, and the DAX index declined by 0.5% MoM.

Economic Indicators and Federal Reserve Actions

The US economy showed signs of slowing, with a softening labor market and easing inflationary pressures, raising expectations of Federal Reserve rate cuts. Despite these trends, the Federal Reserve is unlikely to cut rates in the immediate term due to stable unemployment rates and persistent core PCE inflation. However, strategic factors suggest rate cuts may commence by year-end, with futures indicating a potential drop in the funds rate to around 3.9% by the end of 2025.

Labor Market and Economic Activity

US economic activity indicators have weakened, with the Citigroup economic surprise index falling to its lowest level in two years. Manufacturing and services purchasing managers' indices are below historical averages, and the GDP growth forecast has been revised down to 1.5% for Q2 2024. The labor market also shows signs of moderation, with non-farm payroll growth slowing and the unemployment rate rising to 4.1% in June.

European Market Outlook

In Europe, political uncertainties following elections have influenced market performance. The FTSE 100 index's reaction to the change in the UK government was minimal, likely due to policy continuity and ongoing challenges. The DAX index, despite being softer post-European Parliamentary elections, is expected to benefit from potential earnings lifts and moderate valuations.

Highlights

• US Economic Slowdown: Signs of a slowing economy with a softening labor market and easing inflation, increasing expectations of rate cuts.
• Tech-Driven Market Rally: Significant outperformance by the S&P 500 and Nasdaq 100, driven by large-cap IT companies, leading to elevated valuations.
• UK Market Stability: Minimal reaction in the FTSE 100 index to the UK government change, reflecting policy continuity.
• European Elections Impact: The DAX index remains supported by expectations of earnings growth despite recent political uncertainties.

This month's report underscores the divergence between the robust performance of major US tech stocks and broader market trends, coupled with the complex interplay of economic indicators and central bank policies shaping market expectations.

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