As US stock markets hit record highs, some investors may be afraid to invest as they are concerned if markets have peaked and are nervous about a market correction.

The fact of the matter is that markets don’t move in straight line up, pullbacks are normal from time to time.

Historically, markets have moved higher and peaked multiple times in past cycles. Since

1926, each time the US equities hit its first all-time high, US stocks then delivered a 10% average return for the subsequent 12 months, and 8% in next 24 months. Fresh highs for US stock markets are not necessarily bad entry point for long-term investors.

Looking ahead towards the rest of 2024, the global macro backdrop remains sanguine. The US economy is resilient, while the Eurozone and UK are accelerating, and India continues to fire on all cylinders. China’s growth momentum will be underpinned by the recent housing policy support. Furthermore, global trade is improving, as low inventories are replenished, which should boost economic activity.

Brace for a broadening of earnings

In this environment, companies’ earnings are well supported, especially as wage and interest-related cost pressures are starting to ease. Profit growth is the key reason for our overweight of global equities through US equities. Technology has continued to beat earnings estimates, and the fact that several ‘old-economy’ large-cap companies entered major contracts with tech firms to use AI, tells us that AI already has a real effect on activity and productivity. Importantly, the cyclical tailwind should help profit growth spread beyond technology to other sectors. As the Q2 earnings seasons unfolds, S&P500 companies are expected to report 8.8% earnings growth, potentially marking the highest y-o-y growth rate since Q1 2022¹.

Eight of the eleven sectors are projected to report strong earnings growth, reflecting the broadening of earnings growth outside of the tech sector.

Clearly, the improvement in global economic activity and the broadening of cyclical momentum should support companies’ earnings growth across more geographies and sectors. Tech sector earnings are underpinned by cyclical and structural growth, but as valuations are rich, and therefore active diversification is important.

The US election will be a key area of focus, but second-guessing the result seems counterproductive. History suggests that markets could see some volatility just before the elections due to the uncertainty, but typically rebound after the result is known.

Don’t chase yields, Lock-in yields

While global equities are expensive, global bonds are cheap. The Fed will likely cut rates in September as inflation is falling closer to the Fed’s target. As markets become more comfortable with rate cuts, we could gradually see some price gains for bonds, and support for valuation multiples in equities – but for now, we principally focus on clipping coupons in bonds and focusing on earnings delivery in equities.

Looking further ahead, bonds now offer the highest income potential in decades, which might explain why spreads remain so narrow. Starting bond yields are a good indicator of future annualised return, and today’s levels are attractive by historical standards. Investors should lock in longer-term bonds as opposed to chasing yield from short-term money market instruments.

For investors nervous to enter the stock market, building and locking-in an income stream through a portfolio of global investment grade bonds is not a bad idea, and a great starting point to start investing.

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