Global Market Dynamics: S&P 500's Q1 Gain Overshadowed by Stronger International Markets

Key Takeaway

• S&P 500's 10% Q1 gain overshadowed by stronger performance in international markets, suggesting high US valuations.
• European stocks, especially the Stoxx 600, show strength with April historically being its best month; defense sector outperforms significantly.
• Concerns over sustainability of tech rally and challenges in mining sector due to weak iron ore prices highlight diverse global market dynamics.

Global Market Dynamics

The first quarter of the year has seen the S&P 500 index achieve a 10% gain, a performance that, while impressive, falls behind several other major markets when the strength of the dollar is taken into account. This discrepancy is highlighted by the fact that every sector within the MSCI US index is currently valued higher, in terms of price-to-earnings (P/E) ratios, than their counterparts in the MSCI World ex-US index. This situation suggests that the US market may be experiencing particularly high valuations, potentially making international markets more attractive for investors seeking diversification. The analysis by Cameron Crise in Bloomberg's Macro Man column points out that while the median major-market drawdown is nearing zero, the average drawdown remains at about 10%, indicating that there may still be significant opportunities for growth in markets outside of the United States.

European Markets in Focus

European stocks have shown notable strength, with the Stoxx 600 index demonstrating a "buy-everything" rally that positions it well for further gains. Historically, April has been the strongest month for the Stoxx 600, based on average returns over the past three decades. The Euro Stoxx 50, while not achieving the same level of record-setting performance as the S&P 500, has managed to keep pace and even outperform the US index for a period, particularly before a tech-driven rally in the US took precedence. This rally, however, has sparked debate among strategists regarding its sustainability and the factors that could continue to drive it, such as potential interest rate cuts or earnings upgrades. Notably, the tech sector, with companies like Nvidia, is under scrutiny as it approaches market values comparable to industry giants like Apple.

Sector Highlights and Challenges

The defense sector in Europe has emerged as a standout performer, with companies like Rheinmetall experiencing significant growth, more than 500% since the start of 2022. This surge is reflective of a broader trend of increasing European defense budgets, a movement that analysts from JPMorgan believe could continue for the next decade. Conversely, the mining sector faces challenges, particularly due to the ongoing weakness in iron ore prices. This downturn is largely attributed to concerns over diminishing demand within the pressured Chinese economy, affecting companies based on their exposure to iron ore, with Rio Tinto identified as a notable laggard due to its reliance on the commodity for revenue.