Finding a broader path through narrow markets

Global equity markets posted generally strong results in the second quarter, as a June rally more than made up for mixed performance in April and May. U.S. stocks led the charge, driven by the surging technology sector. Outside the U.S., developed markets outperformed their emerging markets (EM) peers. With inflation easing but still running too high, the U.S. Federal Reserve raised interest rates by 25 basis points (bps) in May before pausing in June. Other central banks around the world also continued to prioritize fighting inflation and warned of further tightening. Meanwhile, the odds of a global recession occurring before year end diminished amid signs of firming growth and resilient labor markets.

Key takeaways

• Inflation continued to ease in many parts of the world, but not enough for central banks to pivot from rate hikes to rate cuts.
• Because monetary policy acts with a lag, the impact of rate increases will likely linger, suppressing demand and potentially threatening global growth. Banking sector turmoil that flared in March has made lenders more cautious, squeezing credit supply.
• The price-to-earnings (P/E) ratio for the S&P 500 Index remains unchanged versus a year ago and still doesn’t reflect the prospect of even a mild recession.
• Overall, we remain neutral on equities. In the U.S., we favor high-quality large caps, particularly dividend growers, and select opportunities in semiconductors and software.
• Outside the U.S., we continue to prefer emerging over developed markets equities given their attractive valuations, solid earnings potential, a weaker U.S. dollar and easier Chinese monetary policy.
• Investors who tune out market noise and stay focused on long-term objectives should benefit amid uncertainty, aided by prudent stock selection and thoughtful portfolio construction.