Falling Interest Rates - Where Are the Capital Markets Heading?

Recent economic developments have elicited mixed reactions in the capital markets. While U.S. inflation data was released within or slightly above expectations, drastic market reactions were absent. Overall inflation stands at 2.5%, and core inflation at 3.2% (Source: Bloomberg, as of 12.9.2024)—figures still above the U.S. Federal Reserve’s target of 2%. Noteworthy is the persistence of core inflation (which excludes food and energy). However, unlike the ECB, the Fed has a dual mandate, which also includes the labor market, signaling potential interest rate cuts from that front.

Falling Interest Rates

Both the ECB and the Fed lowered interest rates in September. Increasing recession fears in the U.S. are mainly due to rising unemployment rates, although the rate at 4.2% (Bloomberg, as of 12.9.2024) is still relatively low. The combination of weak global economic growth and political uncertainty has additionally heightened the risk of a recession. Hence, markets, after reaching all-time highs in summer, are now very sensitive to the release of new inflation or labor market figures. From our perspective, only an economic cooling is expected, which will not end in a recession.

Not Just Tech Anymore

Recent declines in technology stocks, particularly in the field of artificial intelligence, reflect growing skepticism about the achievability of sustainable profits. The initial enthusiasm is giving way to the realization that profitable business models need to be established first. Notably, it is expected in the U.S. that companies beyond the Magnificent Seven will increasingly contribute to the S&P 500’s profit growth. The profit growth of around 11.5% in the second quarter of 2024 was fueled not only by IT giants but also by companies in the financial services, healthcare, and utilities sectors. Additionally, the number of companies in the S&P 500 currently trading above their 200-day moving average is well above 50% (Bloomberg, as of 12.9.2024). Despite uncertainties, we remain overweight in equities as we do not expect a significant downturn—especially in the U.S. Undervalued small caps offer an interesting addition and should benefit from falling interest rates. In terms of bonds, we have increased maturities in Europe and the U.S. and added inflation-protected bonds.

This information provides a market overview and the market opinion of Kathrein. It does not constitute financial analysis and does not include any direct or indirect recommendation to buy or sell securities or a specific investment strategy. Investing in securities is subject to price fluctuations and therefore also capital losses at any time. Past performance data does not provide reliable indications for future results.