Investing.com - Stock markets have generally produced a positive performance in the first half of 2024, driven by strong gains in the technology sector. UBS takes a look at the factors that are likely to determine results in the second half of the year.
Stock Market Forecast for Second-Half 2024
Equity investors mostly enjoyed the first half of 2024, with the broad-based benchmark U.S. index, the S&P 500, gaining just over 14% year-to-date. This strong performance was largely driven by the technology sector, amid continued enthusiasm for all things to do with artificial intelligence (AI).
Companies involved in chips, cloud computing, and data centres saw robust demand, with chipmaker Nvidia (NASDAQ:NVDA) the market star, becoming briefly the most valuable company in the world.
However, amidst this calm there have been sharp outbreaks of volatility, particularly in Europe, sparked by a series of unexpected election outcomes.
Those jitters have sharpened the focus on upcoming political events—the national elections in France and the U.K., and more importantly the U.S. presidential election.
“As political risk premium builds around those events, we may be setting up for one more shot at relief through the summer months before the U.S. election season gets properly underway,” said analysts at Goldman Sachs, in a note, dated June 24.
US Election 2024
The 2024 United States presidential election will be held on Tuesday, Nov. 5, and will be between the incumbent president, Joe Biden, a member of the Democratic Party, and his predecessor, Donald Trump, a member of the Republican Party.
The two oldest candidates ever to run for U.S. president are essentially tied in national opinion polls with fewer than five months to go, and meet on Thursday for their first televised debate.
“The U.S. election is likely to trigger volatility, and we think investors should manage risks accordingly,” said analysts at UBS, in a note dated June 20.
The Swiss bank assigned a 45% probability to a “red sweep” scenario of a Trump victory and Republican control of the Senate and House of Representatives; a 40% probability to a Biden victory with a divided Congress (Republican-controlled Senate, Democratic-controlled House); a 10% probability to a “blue sweep” (Biden victory and Democratic control of the Senate and House); and a 5% probability to a Trump victory with a divided Congress.
But the key takeaway at this stage is that the outcome remains uncertain, and no single outcome can be considered as “likely.”
“We think investors should manage their exposures to the U.S. consumer discretionary and renewables sectors, both of which could suffer if a “red sweep” scenario materializes,” UBS said.
“The consumer discretionary sector, which already faces challenges such as sluggish spending on goods, could see further pressure if trade tariffs are imposed after the election.”
Meanwhile, the renewables sector has performed strongly recently amid optimism about AI demand. But there is a risk that a “red sweep” leads to lower government support.
In contrast, we think that the U.S. financial sector is currently not pricing potentially lower regulation that could materialize under a “red sweep” scenario.
Interest Rates Forecast
“The global rate-cutting cycle is likely to gather momentum in the second half,” analysts at UBS said. “To prepare, we recommend moving excess cash into quality fixed income markets.”
A number of European central banks, as well as the Bank of Canada, have started cutting interest rates. For the Federal Reserve, UBS’s base case is for two 25-basis-point cuts this year.
May jobs data was unexpectedly strong, but other releases—including on inflation, consumer confidence, job vacancies, manufacturing sentiment, credit card spending, and various housing data—all point to a moderation in economic activity.
“We think this weakening in data will be sufficient to justify a first Fed rate cut in September,” UBS added.
As a result, with central banks cutting rates, current returns on cash will not be available for much longer. So investors holding cash or money market funds (or those with expiring fixed-term deposits) need to consider other options for their liquidity.
Additionally, “we see high-quality corporate and government bonds as an attractive destination for investors deploying cash.”
“We also think lower interest rates and benign growth should be supportive for diversified fixed income strategies,” the bank added.
AI Stocks Continue As Key Driver
The enthusiasm surrounding the potential benefits from AI helped the tech sector soar in the first half of the year, with six stocks—Nvidia, Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Meta (NASDAQ:META), and Alphabet (NASDAQ:GOOG)—responsible for 64% of the global equity market’s total return since the launch of ChatGPT in November 2022.
“We expect continued robust capital investment in AI to continue to drive strong earnings growth for companies in the enabling layer. However, we will need to closely watch risks including fears of capacity gluts if innovations change competitive dynamics, advancements stall, or if application monetization does not take off,” analysts at UBS said.
Investors need to make sure they are sufficiently invested in AI, the bank added, tilting towards the enabling layer.
“The AI rush so far has been highly beneficial for the largest tech firms. But we believe that is a feature of the new AI investment landscape, and not a bug,” UBS said. “Alongside semiconductors, we also like the oligopolies that are positioned across the tech stack covering chips, cloud computing, and generative AI models and applications.”
What Should U.S. Investors Do?
As we move into the second half of 2024, it is decision time for investors, and the choices made now will be crucial in navigating the evolving landscape of AI advancements, interest rate changes, and the U.S. election, the Swiss bank said.
“We recommend a balanced approach, diversified across fixed income, equities, and alternatives, to position for long-term financial goals while navigating near-term uncertainties.”
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