The summer season has temporarily brought some sunshine to investors as the main equity markets had been rallying until mid-August. Supporting this trend was a series of assumptions on key themes driving the market: inflation was assumed to be at its peak and starting to recede; growth was assumed to be on a soft landing path; and central banks were assumed to have done most of the work needed.
Back in June, we thought a rebound was in sight as the market had oversold amid a still-resilient US economy and this underpinned our preference for the US equity market within an overall cautious to neutral equity allocation. The main story supporting the market over the summer was the expectation of a possible pivot by the Fed, after its more-hawkish-than-expected actions so far. In a ‘bad news is good news’ scenario, the negative quarterly US GDP number supported this narrative. With Q2 earnings season still showing positive trends, the buoyant market environment has translated into looser financial conditions, further complicating the task for central banks.
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