Ongoing shifts in equity markets are expected to continue amid downgraded U.S. economic growth forecasts, with attention on new data from the U.S. and Eurozone. The S&P 500 faces a swift correction, while global markets remain resilient. Interest in safe-haven assets rises, with gold hitting record highs. Upcoming U.S. inflation reports could impact market sentiment, and European economic indicators are anticipated to support recovery prospects, though uncertainties around U.S. tariffs loom.
Current Market Dynamics and Future Outlook
The ongoing shifts within the equity markets are poised to persist as projections for U.S. economic growth are downgraded. Attention is now turning to fresh data from both the United States and the Eurozone.
1. Market Rotation Analysis
The correction within the U.S. equity markets appears to be intensifying. Analysts from Goldman Sachs note that the decline in the S&P 500 since mid-February ranks as the sixth fastest correction in the past 75 years, driven by a significant drop in growth expectations tied to tariff uncertainties and pressure on tech stocks.
Interestingly, this downturn in U.S. stocks has had minimal repercussions globally. According to Goldman Sachs, regional diversification has proven effective this time around, with traders less inclined to offload non-U.S. equities.
While the S&P 500 has decreased by 3.7% year-to-date, the Stoxx 600 has increased by 8.2%, and the MSCI Asia index has risen by 4.6%. Positive developments in Europe, such as Germany approving a substantial investment plan and China revealing new economic support measures, have bolstered this trend.
Investors are increasingly looking beyond U.S. markets, particularly toward China and other liquid continental indices that are less correlated with U.S. equities. An equity strategist from an investment bank points out that although Chinese markets could face challenges from a potential trade war, their decline would likely be less severe compared to the broader global stock market.
However, it is crucial to note that no index is exempt from the fallout of widespread tariff increases, given the U.S.’s significant role in global trade. Consequently, the current market rotation may decelerate as traders await new tariff policy announcements from the White House, anticipated on April 2.
2. The Rise of Safe Havens
Stocks outside the United States are not the sole beneficiaries of changing market sentiments; there has been a noticeable surge in interest towards risk-free assets. Gold prices soared to a record high of $3,044.41 per ounce last Thursday, while the Swiss franc and yen gained 2.9% and 5.21% against the dollar, respectively, since the year’s outset.
During this same timeframe, the yield on the 10-year U.S. Treasury note has decreased by over 36 basis points to 4.21%. As investors seek to mitigate the impact of escalating uncertainties on their portfolios, the shift to alternative asset classes also reflects a significant change in the outlook on economic prospects.
Looking ahead to 2025, political and economic trends indicate a possible return to a cyclical inflation regime, where economic growth becomes a key political priority, and nominal interest rates stabilize at elevated levels. Frédéric Leroux, head of the Cross Asset team at Carmignac, envisions a gradual shift in economic and financial focus from the United States to the rest of the world.
3. Upcoming Data Insights
The PCE inflation report from the United States will be released on Friday, potentially exacerbating market sentiment, especially if inflation dynamics prove more resilient than anticipated. January’s PCE inflation stood at 2.6%, with BofA economists projecting a rise to 2.7% for February.
Economists suggest that inflation is unlikely to decline sufficiently for the Federal Reserve to consider lowering rates this year, particularly as recent policy measures are expected to support inflation levels.
The Federal Reserve’s latest projections indicate a growing concern over a ‘stagflation’ scenario characterized by rising inflation coupled with slowing growth.
4. Anticipated Economic Indicators
Several leading indicators are set to be released in Europe in the coming days. Preliminary PMI surveys for March will be available on Monday, followed by Germany’s Ifo business climate indicator on Tuesday, French consumer confidence on Wednesday, and the Eurozone economic climate report on Friday.
Additionally, Eurozone credit growth for February and French inflation data for March are expected later this week. The commitment of European leaders to bolster the continent’s defenses, along with Germany’s approval of a significant infrastructure and defense investment plan, could lift the morale of economic stakeholders and sustain the recovery that has been underway since the start of the year.
Bruno Cavalier, chief economist at Oddo BHF, emphasizes the importance of distinguishing between announcements and actual implementation, especially regarding a coordinated industrial policy akin to the recommendations of the Draghi report. However, he remains optimistic about the strengthening prospects for a genuine recovery in Europe.
That said, the timing of this recovery is uncertain, as European investments may take time to influence economic activity, while any anticipated increase in U.S. tariffs could have an immediate effect on European markets.