Risk markets continued their advance in the second quarter, buoyed by positive earnings reports and a softening stance from global central banks.

While employment data showed signs of easing and inflation rates moderated, these metrics, still above some policy targets, helped to temper future rate expectations across an inverted yield curve.

In Europe, several central banks, including the European Central Bank, reduced rates.

Despite significant monetary tightening policies over the past two years, the global economy demonstrated surprising resilience during Q2.

In the United States, real gross domestic product increased at an annual rate of 1.3 per cent in Q1 2024, according to the Bureau of Economic Analysis. While still positive, this data point does mark a deceleration from the 3.4 per cent growth in Q4 2023.

Higher interest rates have begun to have some impact on consumer behaviour, particularly in the housing and construction sectors. Building permits in May came in at a seasonally adjusted annual rate 3.8 per cent below the revised April rate and 9.5 per cent below the May 2023 rate of 1,532,000.

Because permits are a leading indicator of housing starts, this data suggests a slowdown in future property development and associated construction jobs in the coming months.

Strong Q1 corporate earnings reports and marginally less restrictive central bank policies propelled major equity averages to new highs. The S&P 500 gained 3.92 per cent in Q1, while the MSCI World Stock Index advanced by 2.18 per cent.

Sector performance varied, with Information Technology (+11.47 per cent) and Communications (+8.17 per cent) leading, while Real Estate (-3.12 per cent) and Materials (-3.12 per cent) lagged.

Non-US markets underperformed US benchmarks, with the Eurostoxx 50 falling 3.73 per cent and Japan gaining just 2.05 per cent. High-dividend-paying companies were also out of favour, with the Dow Jones Dividend Select Index falling 1.01 per cent.

The Federal Open Market Committee voted unanimously to maintain the Fed Funds target rate at a range of 5.25-5.5 per cent during its May and June meetings.

Despite softened inflation data, policymakers are cautious about pivoting owing to strong macroeconomic indicators.

According to the FOMC dot plot, most members expect the Fed Funds rate to end the year at 4.85 per cent, while the Fed Funds futures market predicts a year-end rate of 5 per cent.

Looking ahead, the potential for a regime change in Washington this year could have significant market implications. The Biden presidency faced criticism after a lacklustre performance in the June 27 debate, with polls indicating up to a 20 per cent gap favouring Republicans.

A Donald Trump presidency is generally considered positive for markets owing to his business-friendly stance, particularly regarding regulation.

Mega-cap technology companies, including Apple and Amazon, at present under intense antitrust scrutiny, could benefit from a less obstructive government.

Banks and energy sector companies could also see increased profit potential with reduced regulation.

Trump has expressed a strong commitment to rebuilding America’s energy resources, having achieved energy independence during his previous term.

Notably, the $4 trillion in tax cuts implemented under the 2018 Tax Cuts and Jobs Act, which reduced the corporate tax rate to a flat 21 per cent, are set to expire at the end of next year.

A Republican victory could pave the way for extending these benefits, sustaining American corporate profits. Smaller companies could also benefit from less regulation, sustained lower taxes and potentially lower interest rates as Biden’s inflationary fiscal spending packages phase out.

• Bryan Dooley, CFA, is the chief investment officer at LOM Asset Management Ltd in Bermuda. Call +1 (441) 292-5000 or visit www.lom.com for further information. This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult their brokers if such information and/or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority