Many investors are questioning whether the global stock market rally can last, after several indexes repeatedly hit record highs. We see further gains ahead, albeit more muted, as the rally is increasingly broad-based, backed by strong earnings momentum and a global reflationary backdrop.
We believe the rally is built on the strength of the broad market, rather than just an individual sector. The chart above shows the contribution from the best-performing sector to the broad annual return of the MSCI ACWI Index each year from 1995. The technology sector has contributed about a third of the index’s return so far this year—near the long-term average for the contribution from the top-performing sector during the period.
More than a handful of stocks
We are seeing greater breadth in major equity markets, with Europe and emerging markets (EM) now playing catch-up to the eight-year U.S. bull market. High stock market breadth gives us confidence in the sustainability of gains. The proportion of individual shares in several major indexes trading above their 250-day moving average has hit a two-year high. In Europe and Japan, this proportion is above 80%.
Tech has provided a big lift to U.S. and EM stocks, but market strength goes beyond this sector. In Europe, tech accounts for less than a tenth of the 8% price returns thus far this year. The breadth of equity market gains is supported by widespread earnings growth. Eight of 11 sectors globally are expected to see earnings growth this calendar year. This follows the first-quarter earnings season that saw double-digit growth in all major regions for the first time since 2010. Global earnings breadth is consistent with global reflation. In April, more than 80% of countries had rising composite Purchasing Managers Indexes compared with 12 months earlier—one of the highest shares since the immediate recovery from the global financial crisis.
Bottom line: Strong economic and earnings performance are driving broad market returns, not just a handful of stocks. We see room for this to run further, reinforcing our preference for equities over fixed income in this environment.
Read more market insights in my Weekly Commentary.