The Weekly Wrap: BayFort Capital Global Equity Research

This week, traders grappled with a cocktail of uncertainties as geopolitical tensions and concerns over prolonged higher interest rates weighed on sentiment. Disappointing earnings reports from large-cap growth names like ASML ?& TSMC further intensified market unease. Throughout the week, all indices encountered downward pressure, impacting both small-cap and large-cap stocks alike. Large-cap growth stocks drove the S&P 500 to a 3.05% decline, while the Russell 2000, representing small-cap stocks, saw a 2.77% drop. Value stocks managed to contain declines with the equal-weighted variant of the S&P 500 retreating by 1.38%. The Euro-STOXX 600 also slipped, posting a 1.18% decline for the week.

The factors that influenced the week's stock market performance were:

Geopolitics: Markets began the week with a positive tone due to the limited impact of Iran's anticipated retaliatory strike on Israel.? Nearly all missiles fired into Israel were intercepted by air defenses, avoiding a more serious escalation.

Fed Speak: The market optimism on Monday proved to be short-lived. On Tuesday, Powell while speaking to a policy forum focused on U.S.-Canada economic relations, remarked, " The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence,". Additionally, Powell stated that " We can maintain the current level of restriction for as long as needed," pending further progress in inflation control. On Thursday, New York Fed President John Williams cautioned that while a rate hike isn't the default expectation, it remains a potential course of action if the data supports it. Meanwhile, Atlanta Fed President Raphael Bostic indicated that policymakers wouldn't consider reducing rates until year-end.

Earnings: On Wednesday, large-cap tech stocks experienced a decline following ASML's earnings report for Q1CY24. ASML, the world's leading manufacturer of lithography machines for chip manufacturing, fell short of Wall Street's Q1CY24 earnings expectations. ASML shifted its growth expectations from the first half to the second half of CY24 while keeping its CY24 sales forecasts unchanged. This sparked speculation that the upward momentum in chip stocks might not be uniform across the sector. These concerns were further reinforced by TSMC's Q1CY24 earnings, contributing to the continued decline in large-cap tech stocks for the remainder of the week. TSMC, the world's largest chipmaker, reported a 3% increase in first-quarter revenue from its high-performance computing segment, encompassing AI chips. Meanwhile, revenue from smartphones declined by 16%, and revenue from its Internet of Things segment grew by 5%.

Geopolitics again: Later in the week, Expectations of a restrained Israeli response diminished, dampening stock prices when reports emerged that Israel's war cabinet had opted for a "clear and forceful" retaliation. On Friday, stocks declined further following Israeli airstrikes on air defense installations in Iran and on Iran-affiliated groups in both Iran and Iraq.

?BayFort Capital View: Market dips resulting from geopolitical concerns can present attractive entry opportunities for investors on the sidelines. While geopolitics may pose short-term challenges, it's unlikely to significantly impact the US economy in the medium to long term. Therefore, markets are expected to eventually overcome these issues. The US Fed is willing to support the economy if required thereby providing support on the downside (if any) to the markets providing a safety net for the markets (known as the "Fed Put"). Futures markets point to a coordinated easing cycle across the OECD, with 29 out of 30 countries. This year is the year of Global Central Bank rate cuts, so we should see valuations improve as interest rates decline in line with rate cuts. This could pave the way for a new stock market upcycle driven by a double whammy: lower interest rates boosting valuations and robust earnings growth fuelled by a paradigm shift in computing and productivity powered by artificial intelligence (AI) in CY24-25. Our analysis indicates that the current market conditions provide an excellent opportunity to invest in global stocks, offering the potential for significant returns over the next 18-24 months.

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