This week in the markets: shares close out a positive February

Shares continue to move further into record territory with markets around the world enjoying a bumper February. While interest rate expectations remain a key driver, investors are looking to earnings growth to justify now historically high valuations. 

Another month, another high 

February was a positive month pretty much wherever you look. In the month to last Friday the S&P 500 rose 4.3% and the tech-heavy Nasdaq was 5.5% higher. The S&P is already above the 5,100 that many market watchers had pencilled in for the end of 2024. The Nasdaq meanwhile is now above 16,000, compared with 10,000 at the market low in October 2022. 

Those are the most important markets, with the US accounting for around 60% of the value of global shares, but the moves were well-supported elsewhere.

Japan was a stand-out performer, up 9.4% in the month to 1 March, closely followed by some markets in Europe such as Italy and France. Even serial underperformer China had a good month, with the Shanghai Composite up by more than 9% and Hong Kong’s Hang Seng index 8% higher. 

The month closed out with hopes rising that a modest slowdown in the red-hot US economy would produce the Goldilocks backdrop of growth being good enough to drive company earnings but not so good that inflation would rebound again and force central banks to leave interest rates higher for longer. 

The outlook for earnings has improved significantly during the fourth quarter results season that is just coming to a close. With almost all the biggest US companies having now reported, around three quarters have beaten expectations by on average about 7%. More importantly, expectations for the year as a whole have risen to 8% growth. 

That goes some way to justifying the market’s historically high valuation, which puts shares on 21 times expected earnings. That’s higher than relative valuations of bonds, for example, would suggest is fair. But if earnings continue to beat forecasts, the valuation will quickly come down to a more sensible level. That is what investors are counting on right now. 

It’s Budget week 

Over on this side of the pond, the main focus is not the market but the Chancellor’s Spring Budget, one of the last opportunities he will have to deliver voter-friendly measures before the scheduled general election which must take place before next January. 

His biggest problem is that forecasts from the independent fiscal watchdog, the Office for Budget Responsibility, give him just £13bn of headroom if he is to stick to his self-imposed rule of seeing public debts falling as a proportion of the economy in five years’ time. With a 1p in the pound cut in income tax costing £7bn, that suggests he doesn’t have much to play with ahead of Wednesday’s announcement. 

For investors, one of the key pieces of speculation is around a so-called Great British ISA, which has been touted in government circles as one possible solution to the shrinking of an increasingly uncompetitive UK stock market. The proposed new ISA would likely come in the form of an additional £5,000 annual investment allowance, on top of the existing £20,000, restricted to shares of UK-listed companies. Opinion is divided on whether this is a good idea that will boost the standing of the UK market or simply encourage home bias, something that would have done UK investors no favours in recent years. 

Attention turns to the US election 

Back over the Atlantic, the spotlight is starting to shine on the upcoming US election in November. The long process to select the main candidates is well underway with the odds shortening fast on another stand-off between incumbent President Joe Biden and ex-President Donald Trump. 

What this might mean for investors is less clear. We know that the two years running up to an election are typically stronger in the markets than the two that follow it. But other than that, there is little for investors to take from the four-yearly Presidential race. The colour of the winning party seems to have little bearing on subsequent market performance. And the state of the market, or the poll ratings of the President, have little influence on which side wins when voters go to the polls. 

Earnings, valuations and monetary policy are likely to be the bigger influences as we move through 2024.

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. Please be aware that past performance is not a reliable guide indicator of future returns. Investments in emerging markets can be more volatile than other more developed markets. 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.