AJ Bell has identified five trends to explain the big movements on the UK and US stockmarket seen in the first half of the year.
Markets on both sides of the Atlantic have had a great first half of 2024, with some big name stocks reaching new record highs.
While valuations are very rich and some expect a pullback, there are also reasons to believe there are further gains to come this year.
First, the UK takeover trend is still intact, according to Dan Coatsworth, investment analyst at the platform. “Four of the top 10 best performing stocks in the FTSE 100 during the first half of 2024 were propelled by takeover activity, including Darktrace, DS Smith and Anglo American,” he said.
“The narrative remains the same – there are plenty of stocks trading on cheaper or depressed valuations relative to peers in other parts of the world and if the market cannot recognise true value, then either a trade buyer or private equity will come along and gobble them up.”
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Second, interest in AI remains high, for now. “A big chunk of the best performers on the S&P 500 in the first six months of 2024 is connected to technology and AI,” Coatsworth said. “Interestingly, chips giant Nvidia is not the overall best performer despite it being the stock everyone talks about. The top slot went to Super Micro Computer which designs and builds servers and storage systems.
“The two sets of quarterly earnings reported by Super Micro so far this calendar year have significantly beaten market expectations, driving up its shares to new record highs. While the stock has pulled back in recent months, anyone lucky enough to have started January with the shares in their Isa or pension, and still hold them today, will still be sitting on some tasty returns.
“The key risk to these stocks and any company seen as an AI winner is that growth rates could moderate leading into 2025, potentially leaving some investors disappointed and leading to widespread profit-taking in the sector.”
The third of the trends is banks being one of the few industries to welcome interest rates staying higher for longer.
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“There are two key reasons why NatWest and Barclays feature among the top 10 best performing FTSE 100 stocks so far in 2024,’ Coatsworth explained. “First, expectations were fairly low at the start of the year due to various issues in 2023.
“These issues now look to have been ironed out, improving market sentiment towards the companies. Second, the Bank of England had been expected to start cutting rates in May but this still hasn’t happened. That’s supportive for net interest margins, the difference between what a bank makes on lending money and the amount it pays out on deposits.”
The next of Coatsworth’s quintent is big brands going out of fashion.
“There was a common theme involving some of the losers on both the UK and US stockmarket, namely that consumers are spending less on some of the big-name clothing or footwear brands or shopping elsewhere,” he said.
“Burberry has had a disastrous time of late as demand continues to be weak in China, traditionally one of its strongest markets. On a broader basis it has been caught up in a luxury goods downturn. A lot of people thought wealthier individuals wouldn’t be impacted by the cost-of-living crisis but that proved to be incorrect. Even the rich have been watching their pennies and that’s bad news for a company like Burberry.
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“The craze to pay big bucks for posh leggings or the latest trainers has also lost momentum, explaining why Lululemon and JD Sports are among the worst performers on the S&P 500 and FTSE 100 this year, respectively. A mixture of consumers being more cautious with spending and fashion moving onto the next big thing have left these companies having to worker harder to shift products.
Last but not least, the fifth trend is dubbed ‘running low on batteries,’ in reference to it being sometimes hard to sustain high levels of growth.
“Investors buy shares in individual companies with the hope they will make more money each year than the last and repeat this trend forever,” Coatsworth said. “But even the best-known businesses aren’t guaranteed to do well. Whitbread certainly falls into this category and it is one of the worst performing stocks on the FTSE 100 this year.
“Miserable weather for much of the first half of 2024 dampened appetite for a last-minute weekend away, thereby hurting Whitbread’s Premier Inn hotels. Mid-week demand has been fine, but the tourist trade has disappointed and that’s spooked investors.
“B&M is a fellow company which has a long history of doing well and a lot of people might assume this situation remains intact permanently. The stockmarket seems to think otherwise, with questions being asked over its ability to sustain strong growth levels. The business is still doing well, but the pace of growth looks more of a slog.”
