This week in the markets: the bull market turns global

The stock market rally since late 2022 has famously been driven by a small handful of stocks - the US’s so-called Magnificent Seven. What’s becoming clear, however, is that investor sentiment is surging on a much broader canvas today. The bull market is going viral. 

Here, there and everywhere

The S&P 500 is up 28% in a year and the equal-weighted version of the US benchmark is also now within a whisker of its all-time high. But the broadening out of the US bull market has a parallel in other global markets too. From India to Japan and Europe too, shares are hitting new highs. 

Last week saw the Nikkei 225 clear a huge psychological hurdle, breaking through the 1989 peak it struck at the height of the country’s stock and property bubble. Shares in Japan have lived under the shadow of that record high for 34 years. No wonder there was a standing ovation on the Nomura trading floor on Thursday. 

Japan is at a new high but everything else is different from the late 1980s. Shares are moderately valued and investors, both overseas and domestic, remain wary. Shares represent a much smaller proportion of total household assets than in comparable Western markets, so optimists believe there is further to go despite a still sluggish economy and rock bottom interest rates.

The other Asian market that’s booming today is in India where, unlike in Japan, domestic investors have the bit between their teeth. A growing middle class is embracing the equity culture in a positively American fashion and shares are now valued on a par with Wall Street, at about 20 times earnings. Unlike in the US, however, it’s a broad-based market rally. The number of quoted Indian companies has grown five-fold in recent years and 180 have trebled in value over the past decade. 

But it’s not just the US and Asia on a roll. European shares are also hitting new highs and here the rally is very much following the narrow-leadership template of Wall Street. Just 11 companies - dubbed the Granolas by Goldman Sachs on the basis of the first letters of their names - account for 50% of the overall market rise in the past 12 months.  

Earnings support

Whether or not the new highs being struck across the world are a cause for celebration or concern will depend to a large degree on the trajectory of earnings in the months ahead. With valuations now historically high in some markets, the onus is on companies to keep delivering the goods in terms of profits growth. 

Fortunately, they appear to be doing just that. With 450 of the top 500 US companies having now reported their fourth quarter earnings, an expected 1% growth rate is coming in closer to 8%. For the full year nearly 10% is expected. After last year’s modest 2.6% decline in earnings, it looks like profits are back on an upwards path. Far from looking like the mature end of the economic, market and earnings cycle, it looks like we are now back safely in mid-cycle as the hoped-for soft landing from the interest rate tightening cycle is unexpectedly achieved. 

The Presidential cycle

All of this chimes with the usual four-year cycle of returns that markets typically deliver around the US’s Presidential election timetable. Historically, the first two years after an election are the worst for markets, as the White House pushes through the more unpopular measures it has just secured a mandate to enact. Then after the mid-term elections, markets tend to pick up as the incumbent President does what he can to get re-elected or set the scene for a victory by his (always a man so far) successor.

So far, the Biden term is looking like it’s matching that template. Last year was a barnstormer for the US market and 2024 has started strongly too. What’s interesting about the data, however, is that the shape of the four-year cycle is one of the few trends that can be safely gleaned from the historical record. In most other respects, the colour of the winning party, or the balance between White House and Congress, actually makes little difference.  

This year’s election feels like it matters a lot - and for investor sentiment it might well do so. But the numbers suggest other factors will matter more.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Please be aware that past performance is not a reliable guide indicator of future returns. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.