The S&P 500 has reached record highs this year, while Japan’s Nikkei 225 index has climbed to its highest levels in three decades. Despite global uncertainties, the US and Japanese stock markets have been thriving. Through this article, let us understand the factors behind the rally and the outlook for these markets.
So, what’s driving the new peaks?
US Market
Monetary & fiscal easing led to a lot of demand resulting in higher corporate earnings growth. Other factors like the emergence of AI & its future potential, falling inflation, and optimism regarding potential interest rate cuts multiplied the investor sentiment on Wall Street.
Diving further in, we notice that the equity market returns as represented by the S&P 500 index have disproportionately come from a small group of high-flying mega-cap stocks. They are a group of high-performing and influential companies: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla collectively known as Magnificent 7 making up about 30-35% of the S&P 500. This clearly reflects a high concentration risk in the US right now.
Japanese Market
In Japan, corporate governance reforms have been crucial, aimed at enhancing company returns. These reforms have led companies to adopt shareholder-friendly practices, such as better disclosures, increased dividends, share buyback programs, and divesting underperforming assets.
Historically, Japan has had weak, even negative, wage growth and deflation as a result of slow GDP growth. More recently, both core inflation and wage growth have been picking up, which suggests more momentum in the economy. Wage growth and the shift from deflation to inflation have also played a significant role, boosting the consumer sector.
Furthermore, Japan’s recent expansion of investment benefits through the Nippon Individual Savings Account is encouraging households to invest in stocks, following years of saving cash.
How about the outlook in these markets?
Looking at the below data for Global earnings estimates and Global Valuations, we can conclude the below:
For the US: Expensive Valuation BUT comfort from higher earnings expectations. Higher exposure to Growth stocks should be avoided at this time and value portfolios should be considered.
For Japan: Earnings estimates are flattening BUT valuation is not too expensive. A small exposure to Japan can be considered for any further correction.
Truemind Capital is a SEBI Registered Investment Management & Personal Finance Advisory platform. You can write to us at connect@truemindcapital.com or call us on 9999505324.
