That burn still burns beginning of August, when the price lists seemed sink in a bottomless hole. Glimpses of calm then returned, but investors are still uncertain. Having archived Jerome Powell's speech in Jackson Hole, which confirmed the prospect of a US rate cut from September, the spotlight remains focused above all on tech sector which ran like crazy in the first part of the year, but then showed some creaks. However, there is also the sector of concern luxury, so penalized by the consumption crisis in China and that pharmaceuticals so indebted. While tensions in the Middle East and the US elections remain in the background.
Gabriel Debach, Italian market analyst of eToro, a social investment community with 38 million users worldwide, outlines the next lines of the markets: since the beginning of the month, the discretionary consumption, utilities and healthcare sectors have shown the greatest increases, a sign that theAppetite for equity risk is back, albeit with a bit of caution. The summer storm tested the markets, but the bullish fundamentals remain solid. Interest in the technology remains central, but despite the general euphoria around AI, there is still some distance between enthusiasm and fully rational investments. The pharmaceutical sector, which enjoys the success of drugs against cancer, diabetes and obesity, could see an improvement from rate cuts, given that the sector is notoriously highly indebted. There could be ideas for re-coverings in the luxury sector.
Was that sharp drop in early August just a summer storm or something more?
A summer storm that nevertheless reawakened the numb sides of the market. Although markets have mostly recovered from the sell-off, the market has once again revisited the negative correlation between stocks and bonds, with the latter returning to investors' portfolios. The fear of inflation now seems to give way to recession, with geopolitics in the background (see gold at historic highs as a barometer) while the flare-up of volatility and the VIX brings investors back on guard about upcoming future events. But the rebound should not make us forget how something has changed. Despite the renewed interest in semiconductors and Big Tech, defensive sectors have been leading Wall Street since the beginning of the month. Since the beginning of the month, the discretionary consumption, utilities and healthcare sectors have shown the greatest gains, a sign that appetite for equity risk has returned, but with a hint of caution inherent in it. Notice how the equally weighted S&P 500 index recorded new all-time highs ahead of the weighted S&P 500.
It now seems that the worst on the markets is behind us and some buying is back. Is it a real rise or should we fear further downturns?
Despite the strong sell-offs that hit the markets in just 3 days, in the end the correction on the S&P 500 was less than 10%. So nothing alarming. Corrections are an inevitable part of the market cycle. Pullbacks of 5% or more occur more than three times a year, pullbacks of 10% once a year, and corrections of 15% every two years. While current volatility may seem unsettling, it is useful to remember that periods of high volatility often herald positive returns in the following six months. While the summer storm has tested the markets, the bullish fundamentals remain solid. Uncertainties and corrections are part of the normal market cycle. The next response of the markets to the many expected rate cuts, expected in September, and the upcoming US elections could lead to new justifications for concern.
Techs: despite trying to recover from the deep decline at the beginning of August, the market fears that they have not finished deflating
The recent correction has contributed to lightening some valuations and reconsidering the weight of the sector in investors' portfolios. However, interest in technology remains central: the XLK index is still around 5% from its all-time highs, with last week marking the best weekly performance since November 2022, a sign that confidence in the long-term potential term of the industry has not been shaken. Investors are carefully analyzing quarterly reports for signs that huge investments in AI-related technology and infrastructure are starting to produce concrete results. However, uncertainties persist. On the one hand, there are those who speak of a potential bubble in the tech sector, on the other, it is argued that current investments may be rational considering future prospects. As often happens in phases of market enthusiasm, it is difficult to predict the moment in which the hype could explode, and the risk of being left "holding the match" is always present. Meta, for example, has shifted focus from efficiency to large Capex expenditures, with Mark Zuckerberg stressing the importance of getting ahead of the curve: “I would rather risk building capabilities before they are needed, rather than doing it too late, given the long timescale needed to start new infrastructure projects…. the companies that are investing are making a rational decision. Because the downside of being behind is that you are out of position for the most important technology for the next 10 or 15 years.” Even though Nvidia managed to stay just -4% from its all-time highs, other AI-related stocks did not follow the same trend. Super Micro Computer, for example, lost 47%, while ARM fell 29%. These contrasting movements indicate that despite the general euphoria around AI, there is still some distance between enthusiasm and fully rational investments.
What are the indications for the luxury sector, which has been so strongly affected by the absence of Chinese consumers?
The luxury sector is experiencing a period of significant uncertainty, mainly due to weak demand in China, a crucial market for the segment. LVMH, the world's largest luxury goods conglomerate, reported a 1% revenue contraction in the first half of 2024, with organic growth limited to 1%. This result represents the lowest growth rate since 2009, excluding the exceptional nature of the pandemic. The drop in demand also had a direct impact on LVMH's operating margins, which shrank by 2 percentage points. LVMH management's lack of forecasts for the second half of 2024 adds further uncertainty to the company's short-term prospects. However, the signs of weakness are not limited to LVMH alone. Burberry reported a 21% decline in comparable sales globally in the first quarter of 2025, down from 18% in the same period last year, highlighting how macroeconomic uncertainty is negatively impacting all key regions (uncertainty which led management to suspend dividend payments for the year). Other luxury players, such as Swatch and Richemont, have also reported a significant reduction in demand in Chinese. This negative trend suggests that China's economic slowdown remains severe and could extend beyond the real estate sector, impacting additional economic sectors. After resisting the pressure of rate hikes, the luxury sector is now once again having to face the challenges posed by the Chinese slowdown and global macroeconomic uncertainties. It is no surprise, therefore, that LVMH is currently among the most shorted large-cap stocks in EMEA, according to Hazeltree's latest Shortside Crowdedness Report. However, with the stock down more than 23% from recent all-time highs and a below-average NTM P/E ratio, it would not be unexpected to see the stock and sector attempt to recover, trying to climb back up from the suffered strong sales.
How do you see the pharmaceutical sector, with drugs against obesity, diabetes and cancer, weighing on its debt?
The pharmaceutical sector is proving to be extremely dynamic and resilient, with some areas driving growth despite global challenges. A central theme is certainly that of anti-obesity drugs, which continues to support companies such as Novo Nordisk and Eli Lilly. Novo Nordisk, in particular, has become the first European company by market capitalization, while Eli Lilly has seen an increase in its shares of approximately 59% since the beginning of the year, positioning itself as the best performer among all healthcare companies with a capitalization exceeding 50 billion dollars. This success has been fueled by strong demand for its key drugs, such as Mounjaro, used to treat type 2 diabetes, and Zepbound, for weight loss. The success of these drugs has allayed fears of possible market overvaluation and led Eli Lilly to raise its full-year 2024 forecast. Combined sales of Mounjaro and Zepbound greatly exceeded expectations for the second quarter, helping to consolidate the company's leadership in the sector. For Novo Nordisk, the drugs Ozempic and Wegovy had a significant impact, accounting for about 57% of its sales. On the European front, AstraZeneca is continuing to strengthen its position as the UK's most valuable listed company (becoming the first UK company to be valued at more than £200 billion), thanks to its progress on cancer drugs. The company reported 18% growth in total revenue in the first half of 2024, fueled by robust demand for its key medicines. This allowed AstraZeneca to raise its full-year forecast, with double-digit percentage growth expected in both total revenue and earnings per share. Positive clinical trial results and new approvals promise to further support the company's future growth.
Overall, the pharmaceutical sector could attract investor interest again, especially in a context of sector rotation and defensive positioning, considering the possibility of rate cuts that could benefit the notoriously indebted sector. Despite the underperformance of the XLV healthcare sector in 2023, which fell 19% compared to the S&P 500, recent performances by major pharmaceutical companies suggest a recovery in the sector, supported by therapeutic innovations and the growing need for healthcare solutions globally .
We are on the verge of the first US rate cut since the pandemic. Did Powell's speech in Jackson Hole convince you?
Fed Chair Powell provided the element investors were looking for in his Jackson Hole remarks: clarity on rate cuts. Powell acknowledged diminishing risks to inflation and rising risks to employment, saying the time has come for the Fed to adjust policy. As for timing, it is nearly impossible for the Fed to find common ground. Either cut rates with the risk that it is too soon and therefore risk a reflationary response or wait and risk a collapse of the labor market. This is the reality of data dependency. Some investors might have hoped for greater clarity on the extent of the rate cuts, but this was still a very remote possibility. Ultimately, Chairman Powell provided what the market wanted, certainty about the Fed's monetary policy going forward, opening the door to the first rate cut in more than four years.
Which sectors will benefit from the rate cut and which will be affected? The euro/dollar cross? They? Bitcoin?
It will be important to monitor the sectors most sensitive to economic dynamics and interest rates, from real estate to the financial sector, with particular attention to mid caps, which have shown a significant delay in the current rally. Gold is already anticipating this movement, benefiting from a favorable context that has strengthened its role as a safe haven asset, overtaking Bitcoin, often called "digital gold". Geopolitical risks, increased purchases by central banks and falling real rates are creating the ideal conditions for its growth. Investors' search for diversification, at a time when stock indices are reaching new all-time highs, completes the perfect framework for gold's rise. Despite outflows from gold ETFs since the start of the year, the precious metal continues to post gains. Interestingly, while ETFs show limited interest, American consumers are increasingly buying gold bars, as evidenced by sales at Costco. Despite the recent correction, Bitcoin's run remains impressive +37% since the beginning of the year, approximately double that of the S&P 500 (currently at around 18%). Theoretically, a rate cut would be positive for the crypto asset, but I wouldn't force its hand.
And in Europe? Do you expect further rate cuts from the ECB this year and of what size?
The ECB has already embarked on the process of reducing rates, cutting them more than two months ago. Markets continue to anticipate further action, expecting around half a percentage point of new cuts by the end of the year. Current forecasts indicate a 90% chance for a 25 basis point cut in the deposit rate to 3,5% as early as September, with the possibility of at least one follow-up move before the end of the year. These expectations reflect the ECB's desire to keep inflation under control while balancing the economic slowdown.
And then there are the US elections in sight. How much could they impact the price lists? How have they acted in the past in election years?
Politics has a limited impact on your long-term portfolio returns. By analyzing historical data, it is clearly seen that market crashes and economic crises have occurred during both Democratic and Republican administrations. No president, of any party, has the ability to single-handedly control a $57 trillion stock market. The predominant factors driving market performance have always been the economy and corporate profits, not who occupies the Oval Office. Election years tend to be good for markets. On average, stock markets register gains of 14,4% in election years. However, regardless of who wins, there are risks that could generate volatility, such as an escalation of a trade war or issues related to debt management. Volatility aside, it's the business that matters.
