Quarterly Market Review & Outlook: Q2 2023

Global equities continued their positive momentum in the second quarter of 2023, with the MSCI World Index rising 13.99% and finishing up 22.28% from last October’s bear market lows. The S&P 500, and most other developed market indices are also up over 20% from their lows, crossing the common threshold for the start of a new bull market. Unfortunately, there is no surefire way to know a bull market is underway in its early life, but as John Templeton says, “bull markets are born on pessimism” and investors typically dwell on macroeconomic woes while stocks march higher as they climb the proverbial wall of worry. Where we are today seems to fit that bill; macroeconomic data is mixed, and volatility likely persists from here, but equity markets are not the economy, and they seem to be looking ahead to a brighter future as the recession that many market participants feared does not seem imminent.

Looking beneath the headline index performance, differences in returns on a stock, sector and market capitalisation level emerged. Artificial Intelligence (AI) driven excitement lifted mega cap tech stocks higher with chipmaker NVIDIA Corporation a notable outperformer, up 189.46% year to date following a blowout Q1 earnings release; they revised up their Q2 revenue guidance to $11bn vs $7.2bn consensus expectations on higher AI related demand. With AI on track to be the biggest boost to economic productivity since the invention of the Internet, we explore the developments, opportunities, and risks later in this document.

Beyond AI, first quarter earnings were a notable bright spot across the board, even if market reactions were relatively muted in general. Heading into earnings season, consensusestimates for the S&P 500 was a 6.7% y/y decline in Earnings per Share (EPS). Although marking a second consecutive quarter of earnings declines, the actual year-over-year EPS decline came in at a much better than feared -2.1%, with 78% of companies beating expectations, above the 10-year average of 73%. Strong Q1 earnings results and guidance highlights corporates’ continued resilience in face of greater macroeconomic uncertainty.

Market breadth, a relative measure of advancing compared to declining stocks, came under increasing scrutiny this quarter. Strong gains were largely concentrated in the mega cap growth space with the “Big 5” US stocks (Apple, Microsoft, Alphabet, Amazon and Nvidia) accounting for over half the S&P 500 realised gains year to date. Many other companies failed to keep up with the broader index, explaining the divergence of returns we see in Chart 1 between the S&P 500 Market Capitalisation vs the Equal Weighted Index. However, unlike early bull markets, which typically feature wide market breadth, historically narrow breadth itself has not been a precursor to equity market weakness. Concerns around weak market breadth also eased towards quarter end as AI excitement moderated, soft-landing expectations picked up and the debt ceiling overhang lifted, helping broaden the market rally to small and mid-cap stocks.

Click here to view our Q2 2023 Market Review & Outlook in full, where the team also go on to discuss fixed income markets in more detail, as well as the US debt ceiling debacle and the banking sector turmoil and the rise of Artificial Intelligence (AI), amongst other topics.

Please reach out via our contact us page should you wish to discuss or speak to one of our relationship managers or dedicated investment team.

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