The global growth cycle hit its lowest point in 2023 and is now picking up. Meanwhile, earnings estimates have been creeping higher.
And although central banks are hesitant to lower interest rates at this moment, they are conveying more accommodative signals to the market, which maintains the prevailing 'risk-on' sentiment.
This time last year, California’s Silicon Valley Bank collapsed and sparked a brief banking crisis in the US, roiling financial markets and ultimately claiming a few additional regional bank victims.
Fast forward to March 2024: the St Louis Financial Stress index is the lowest since the Federal Reserve began raising rates.
Bank deposits have stabilised and risen since the 2023 banking panic, showing that confidence in the banking system is returning. What a difference one year makes.
Indeed, while the number of Fed rate cut expectations has moved from seven at the start of 2024 to three as of now, markets do not seem to care.
The S&P 500 just crossed 5,200 for the first time ever, the Nikkei 225 index is trading above 40,000 for the first time in three decades, the Europe Stoxx 600 hit new all-time highs, gold is trading above $2,200 (£1,736) for the first time ever, and oil prices are creeping higher.
Copper has suddenly broken out and US corporate bond spreads remain very tight. Last but not least, bitcoin has hit a new all-time high at $73,000 dollars.
Are we in the middle of a new mania?
To be fair, there are indeed some reasons to be cheerful.
First, the global economy is doing better than anticipated. A global manufacturing recovery seems to be unfolding. US consumer sentiment is holding up. China is finally considering deploying more fiscal stimulus. The hard landing scenario seems unlikely and the 'no landing' probability is rising.
Better-than-expected economic numbers are propelling earnings estimates higher.
Artificial intelligence could trigger a productivity boom, which should help keep corporate margins at a high level.
Market dynamics are also sending positive messages to investors: the upward trend remains robust, the participation to the upside is broadening, cyclicals are outperforming defensives, and commodities are starting to pick up. Meanwhile, bond volatility is decreasing and the dollar is stabilising.
Finally, investors seem to be cheering the fact that central banks will still cut rates despite the resilience of economic growth and the stickiness of inflation. The 'reflation' thesis was corroborated by the two most important central banks meetings that took place this week.
First, Bank of Japan governor Kazuo Ueda has decided to end the policy of negative rates. This move was widely anticipated, and the dovish tone around this decision pleased investors and did not lead to the yen appreciation that was feared by markets.
In the US, the Fed kept interest rates unchanged as expected.
But there was a positive surprise for investors: as compared to their December forecasts, the Fed is expecting higher real GDP growth (2.1 per cent vs 1.4 per cent), lower unemployment (4.0 per cent vs 4.1 per cent) and higher core PCE inflation (2.6 per cent vs 2.4 per cent) – but it is still anticipating three rate cuts this year.
