This week in the markets - the rally in shares finally broadens out

The ‘everything rally’ in markets is finally broadening out. With many benchmark indexes around the world having been led by a small handful of, usually large, companies, the also rans are now catching up as investors start to chase momentum.

Buying what’s going up 

Every bull market has a tipping point when investors stop worrying about the reasons why assets are appreciating and simply jump on the bandwagon, buying what’s rising.

This is happening most clearly - and unusually - in two assets which would normally be expected to respond differently. Bitcoin is a speculative asset that rises alongside risk appetite. Gold is a safe haven. But both have recently hit new record highs as investors chase momentum.

Bitcoin is above $71,000, boosted this week by news from the Financial Conduct Authority that it is to follow regulators in other markets and give a nod to the creation of crypto-focused exchange traded notes, albeit only for professionals. That adds to the appetite for crypto triggered by the launch of ETFs in the US and an imminent restriction on the rate at which bitcoins can be mined - what’s called a ‘halving’.

Gold meanwhile is defying the sceptics, up to nearly $2,200 an ounce despite a rising dollar and high interest rates. Both would normally be a headwind for the precious metal. A strong dollar makes gold expensive for non-US buyers. And high bond yields increase the opportunity cost of holding an asset that pays no income.

The broad-based rally now includes the mainstream too. For the first time in 26 months, the equal weighted S&P 500 index has hit a new high. No longer is the bull market just about the Magnificent Seven in the US or the Granolas in Europe. Around 80% of shares are now above their 200-day moving average. We haven’t been here since the post-pandemic rally in 2021.

Can it last?

Whether the rally lasts will now depend in large measure on what happens to earnings. Whether the bull market rests on firm foundations or is just speculative ‘froth’ - the views respectively of Goldman Sachs and JP Morgan - hangs on the fundamentals of profits and valuations. 

The good news is that earnings rose much more strongly in the fourth quarter than expected. The forecast at the start of the latest earnings season was for a 1% year on year rise. In the end it turned out to be an 8% improvement. For the full year we’re now looking at a 10% increase, with an even bigger gain expected next year.

That sort of earnings uplift will be necessary if the six-percentage-point rise in valuations - from a mid-teens PE at the October low to the low 20s now - is to be justified.

For that to happen, the market’s forecast of a soft landing - lower inflation, no recession - will also be required. And with short-term bond yields higher than longer-dated ones - the so-called inverted yield curve - that’s not a given.

UK back in favour

Meanwhile, closer to home, the UK is starting to shake off its sick-man image. Last week’s Budget left markets unshaken. The Chancellor had little headroom for big pre-election giveaways, and he didn’t push his luck. A £10bn national insurance handout was offset to some degree by revenue raisers elsewhere - from non-doms and oil and gas companies mainly. He stuck within his fiscal rule of cutting debts as a proportion of the economy within five years.

That show of prudence was good for both bond and shares. And it helped the pound push closer to $1.30, well above the lows reached in the aftermath of the infamous 2022 mini budget of unfunded tax cuts.

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