AI stocks drive Wall Street growth

April inflation data has been released and UK inflation has dropped to 8.7%, which is the sharpest decline since the cost of living crisis began. Although, food prices continued to rise at the fastest pace in 45 years. Another rate increase is expected at the June meeting of the Bank of England, with the market already pricing rates to nearly 5% by August before gradually falling over the next five years.

According to the latest release of UK wage data, private sector wages increased by an average of 6.7% year-on-year and unemployment has risen to its highest level in a year.

European stock markets have been the star performers in 2023, supported by news from the European Commission that the EU’s economic growth is likely to be much better than expected. The rapid decline in energy prices and indications that inflation has reached its peak across the continent have benefited households and generated a more optimistic outlook amongst investors.

While the focus is often on Wall Street, the Japanese stock market has recently demonstrated an impressive recovery. The NIKKEI 225 Index has surged past 30,000 and is on its way to possibly match its all-time high from December 1989.

According to technical analysts, the Nikkei is currently at its most "overbought" level in the past five years. It's worth noting that Japan has experienced many rallies over the past few decades, but this time could be different. In the early years of Premier Shinzo Abe's "Abenomics" campaign, investors were excited and the market rallied aggressively. However, the euphoria eventually wore off and the market dropped by 20% in a matter of weeks.

On Sunday, US Treasury Secretary Janet Yellen reaffirmed that early June is a “hard deadline” to raise the federal debt ceiling. However, investors remain optimistic that the US will raise the debt limit and avert disaster.

We believe that some institutions have become overly pessimistic about the market outlook. Global investors have become more bullish and willing to invest in risk assets such as equities.

We expect a mild recession this year as our base case outlook, thanks to a resilient consumer and a better-than-expected corporate earnings backdrop. However, there are some negative indicators that show consumer strength is beginning to show signs of fatigue, which we are watching.

Looking ahead, we hold a positive outlook for equity markets in the coming months. We expect the markets to anticipate a rebound in economic and earnings growth, which will provide support for a durable recovery. Ultimately, we believe that the bear market reached its bottom in mid-October 2022, and since then, a renewed bull market has begun.