Your May market update

By Moneyfarm Chief Investment Officer Richard Flax

After a strong first quarter for equities, equity markets have been a bit more subdued over the past few weeks. That’s partly driven by questions about the outlook for interest rates. At the start of the year, investors expected policy rates to fall quite sharply during 2024. But inflation over the past few months has come in higher than expected, and that’s prompted a rethink. That’s particularly true in the US, where some analysts have begun to raise the possibility that the Federal Reserve may need to raise its policy rate. 

We think that the major Central Banks will follow slightly different paths over the course of the year. We think the European Central Bank will move first, lowering rates in the next couple of months. We don’t expect the Federal Reserve to increase rates this year, but we think it will only lower rates towards the end of the year. We think the Bank of England will end up somewhere in between.

But we shouldn’t just focus on exactly when Central Banks will begin to cut rates. We also need to think about how much policy rates are likely to move from here. Since 2021, the Bank of England’s base rate has risen from virtually zero to over 5%. And that’s had a knock-on effect throughout the economy. But we’re not expecting rates to fall in the same way from here. We think inflation is likely to be stickier going forward and that could limit the ability of Central Banks to lower policy rates significantly. Rates will come down, but not by that much. 

The second topic is around corporate earnings. We’ve seen a lot of companies report results recently, particularly in the US. It’s helpful to understand how companies are performing in the current environment. The basic message is that corporate results, at least from listed US companies, have been pretty healthy. Generally companies have done better than analysts had expected. Although some companies did point to weaker demand among lower income consumers. Overall, though, corporate profitability has held up pretty well so far, despite higher interest rates.

So the basic message is that interest rates will start to come down gradually over the coming months, led by the European Central Bank. But they probably won’t come down to the levels we saw in 2020 and 2021. Listed companies continue to perform fairly well and maintain their profitability. We think the prospect of lower rates in Europe could help to accelerate growth over the coming quarters and that could prove positive for European equities going forward. We recently added to European equities across most of our model portfolios.

Richard Flax: Richard is the Chief Investment Officer at Moneyfarm. He joined the company in 2016. He is responsible for all aspects of portfolio management and portfolio construction. Prior to joining Moneyfarm, Richard worked in London as an equity analyst and portfolio manager at PIMCO and Goldman Sachs Asset Management, and as a fixed-income analyst at Fleming Asset Management. Richard began his career in finance in the mid-1990s in the global economics team at Morgan Stanley in New York. He has a BA from Cambridge University in History, an MA from Johns Hopkins University in International Relations and Economics, and an MBA from Columbia University Graduate School of Business. He is a CFA charterholder.