The financial markets and especially the bond markets fluctuated between hope and fear last month in anticipation of the next steps for US monetary policy. Whereas last year market participants were anticipating a total of seven interest rate cuts by the end of 2024, these expectations have been increasingly lowered since the year began. That’s why the Federal Reserve’s decision on interest rates in June was eagerly anticipated. Information relevant to monetary policy caused volatility on the bond markets in the lead-up to the announcement. The recent fall in US inflation raised hopes that monetary policy could still be eased considerably this year. Neither the Federal Reserve’s decision not to cut interest rates nor the rather cautious announcement that policy rates would not be lowered until the end of this year, if at all, changed the situation much.

High expectations placed on tech stocks

However, this had little impact on the US stock markets, which made gains despite the rollercoaster ride on the bond markets. Above all, tech stocks benefiting from artificial intelligence continued to rise. However, very high expectations have now been factored into the prices of these stocks. The past tells us that companies don’t experience endless earnings growth. On the contrary, historical US data shows that new technologies have not changed the overall market’s growth trajectory in the long term. High corporate earnings actually attract new rivals, bringing competition back into play and normalizing corporate profits and share prices.

A further challenge for growth stocks, such as those in the tech sector, is that we see considerable upside potential in capital market interest rates. The current situation, where much higher interest can be earned on the money markets than on the capital market, isn’t sustainable. Interest-sensitive growth stocks are usually hit hard by rising long-term interest rates. In this climate, we remain sceptical of the tech-heavy US stock market and favour value stocks.

A cautious approach is advised

European and Asian stock markets showed weakness compared to their US counterpart. Following political uncertainty in Europe in the wake of European parliamentary elections, equity markets in Europe have fallen sharply of late. Weaker economic numbers from Japan and China’s still sluggish recovery meant Asian stock markets suffered losses, too. By contrast, the Swiss equity market was quite robust. After performing sluggishly earlier this year, it staged a recovery recently and its annual performance now stands at over 8 percent. The economic outlook for Europe nevertheless remains gloomy, while the US economy may also have peaked. That’s why we’re still favouring the defensive Swiss stock market and emerging market equities over European and US shares. 

Performance of asset classes

Our positioning – Swiss focus