Last week saw a wild ride in the markets with the S&P 500 having its worst day since 2022 on Monday, and then its best since 2022 on Thursday.

The ten-year US Treasury yield fell below 3.7 per cent on Monday as investors sought safety, but ended up the week around the 4 per cent level. The VIX (Chicago Board Options Exchange's) volatility index, also known as the fear gauge, shot up to its highest level since 2020 before settling down by the end of the week.

Weaker earnings growth prospects from a few of the so-called Magnificent 7 group of mega cap technology leaders, an ostensibly poor US employment report and a rare interest rate hike announced by the Bank of Japan all contributed to the initial sell-off.

The US economy is showing signs of weakening at the margins, despite demonstrating relative growth throughout the first seven months of 2024.

According to the International Monetary Fund, US growth is projected to decelerate from 2.6 per cent in 2024 to 1.9 per cent in 2025. This slowdown is largely attributed to the cumulative effects of higher interest rates, which are beginning to permeate the broader economy.

Previously, hot consumer sectors such as travel and retail had been showing signs of fatigue. Moreover, political uncertainty leading up to the November election is likely to add further pressure.

While the possibility of a recession cannot be entirely ruled out, it is deemed improbable by most economists.

However, vigilance is essential, and close attention will be paid to leading and coincident economic indicators.

A sectoral recession, where specific industries experience downturns while others maintain growth, is plausible. Significant investments in artificial intelligence and related technologies, for example, are expected to sustain buoyancy in industries connected to innovation, offsetting weakness elsewhere.

On the global stage, economic growth may become increasingly dispersed. Japan and several major European economies are anticipated to recover from their anaemic growth, while the US and China are on track to decelerate, at least modestly.

The UK, having recently cut interest rates, stands in contrast to the US, which has kept rates steady. Japan's economy, though recently affected by supply chain disruptions, is expected to stabilise once these issues are resolved.

However, Japan’s financial markets have been turbulent, following their announcement to raise interest rates from 0-0.1 per cent to 0.25 per cent, which was subsequently retracted, adding to market uncertainty.

Looking forward, opportunities may arise in jurisdictions that are positioned to benefit from the global shift away from reliance on China. As multinational corporations diversify their supply chains to avoid trade tariffs and reduce geopolitical risk, other regions could see increased investment.

In the US, high manufacturing labour costs may limit the potential for large-scale reshoring, despite growing anti-China trade sentiment.

The upcoming US election introduces additional uncertainty.

Former president Donald Trump is clearly better for business and the markets, but he is proposing increased tariffs on China, which could hamper trade.

But more critically, the expiration of about $4 trillion in US tax breaks at the end of 2025 adds further complexity, as these are more likely to be extended under a Republican administration.

A Democratic victory could lead to policies perceived as unfavourable by wealth creators, potentially driving away high-net-worth individuals and hurting small businesses.

Democratic candidate Kamala Harris has proposed further taxes on investors including a tax on unrealised capital gains. The role of swing states and independent voters will be crucial in determining the election outcome. The ultimate composition of US Congress may be just as important.

The US economy remains bifurcated, with lower-income workers facing significant challenges, while those with savings are benefiting from higher interest rates and strong market performance. The focus on promoting a green economy continues to grow, often at the expense of traditional industries, which are struggling to adapt. Despite a decrease in emissions in most developed economies, China’s emissions continue to rise, even as the country leads the world in solar panel production.

Market participants should brace themselves for further volatility. Equities as a whole are not especially cheap and broad market valuations now depend on some extent on central bank stimulus.

Importantly, the financial markets are forecasting up to five rate cuts of 0.25 per cent each through next January. If Fed Chair Jerome Powell delivers on at least half of these cuts starting in September, that may alleviate some of the valuation concerns as lower rates mathematically support higher equity valuations.

Overriding everything, however, is corporate earnings. After delivering a respectable ten per cent earnings per share growth in Q2 so far, American corporates need to deliver in the second half of the year in order to sustain market momentum.

Selectivity will be the key to successful investing going forward.

• Bryan Dooley, CFA, is the Chief Investment Officer at LOM Asset Management Ltd in Bermuda. Please contact LOM at +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 with 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