Investing.com – The first half of 2024 will be marked by an AI-driven stock market rally, volatile bond yields and political uncertainty, according to analysts at UBS.
So what does the third quarter hold for investors? In a July 1 note to clients, analysts outlined several key themes they will focus on over the current three-month period.
First, they said that while they believe the momentum of the AI boom will remain strong in the coming months, many question the lasting strength of the tailwinds that have lifted a relatively small number of emerging technology-related stocks.
Part of the concern, they added, stems from the recent drop in shares of Nvidia (NASDAQ:) after the artificial intelligence pioneer hit a record high and briefly became the world’s most valuable company by market value in June.
Despite the uncertainty, analysts said the AI sector “currently offers the best combination of attractive and visible earnings growth profiles, strong competitive position, and reinvestment path.” As a result, they are particularly bullish on semiconductor companies.
Beyond AI, analysts also expect the Federal Reserve to likely start cutting interest rates in the second half of 2024.
Minutes from the Federal Reserve’s June policy meeting released earlier this week showed officials were reluctant to start cutting interest rates from a range of 5.25% to 5.5%, the highest level in more than two decades, until they saw more evidence of falling inflation. However, analysts claimed that data on inflation and economic activity “were supportive of easing financial conditions.”
They expect the Federal Reserve to cut interest rates twice this year, the first in September.
Analysts added that in terms of specific asset classes, they view gold as a hedge against ongoing geopolitical tensions and “election-related concerns about factors such as the independence of the Federal Reserve.”
They expect gold prices to rise to $2,600 an ounce by the end of the year and $2,700 an ounce by mid-2025. Gold was trading at $2,364.07 an ounce at 06:48 ET (10:48 GMT) on Friday.
Elsewhere, they said there was now an “attractive entry point” for investors looking to move into fixed income from cash ahead of the expected drop in yields caused by expected rate cuts by the Federal Reserve.
“If the Fed changes its stance in September, as we expect, US Treasuries are expected to rise as the market turns its attention to the size of interest rate cuts not only this year, but also next year and beyond,” the analysts said.
Finally, US politics will be a major theme for markets, especially after President Joe Biden’s disastrous debate performance last week cast doubt on his ability to stay in the race for re-election. Currently, polls suggest that the November vote will result in a so-called “red sweep,” with Donald Trump reclaiming the presidency and Republicans taking control of both chambers of Congress.
In such a scenario, analysts recommended “adequate exposure to the financial sector,” noting that these companies would benefit as conservative lawmakers eased regulatory restrictions on the industry. On the other hand, they expressed some caution on consumer discretionary and renewable energy names, saying they “could lag” in the event of a red sweep.