Investment Viewpoint: robust equity markets thanks to cuts and AI

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Markets and macro insights with Bernard Swords, Chief Investment Officer

What drove last week’s strong performance in equity markets?

• Equity markets delivered a strong performance last week, with the MSCI World Index rising over 1.5%. Two key factors supported this rally. Firstly, expectations for interest rate cuts in the US remain strong, providing a favourable climate for risk assets. Secondly, renewed confidence in the field of artificial intelligence (AI) helped drive market sentiment, particularly after the earnings release from the software corporation Oracle. The company reported a substantial increase in demand for its cloud infrastructure services, with its backlog of orders rising to nearly $500 billion – up over $300 billion since March.

• As a result, the information technology sector led market gains, rising close to 3% in local currency terms. Cyclical and interest rate-sensitive sectors also performed well. Defensive sectors were under pressure with Consumer Staples and Healthcare down over the week.

Where were results more mixed?

• Fixed income markets delivered mixed returns, with yields from long-maturity US bonds falling sharply (short maturity yields fell only marginally). European bond markets showed no dramatic fluctuations, with yields rising and curves flattening by just a few basis points.

• The European Central Bank (ECB) sent a discouraging message on interest rates, confirming that they would not be cut, and that the obstacles to reducing them remain considerable for the near future.

What is Goodbody’s assessment of the current situation?

• In light of recent market developments, we reviewed our positioning at our monthly asset allocation meeting. In August, our equity strategy centred on a defensive stance, anticipating near-term challenges. Since then, markets have performed better than expected, buoyed by expectations of lower interest rates, robust demand in AI-related sectors, and resilient US consumer sentiment. However, the labour market continues to flash warning signals, which may reflect underlying concerns about corporate confidence and future consumption.

• As a consequence, we see a heightened risk of anxieties regarding economic growth in the fourth quarter of this year. Given that equity valuations are now approaching one standard deviation above their long-term average, markets could be vulnerable to news of any negative trend. The prospect of rate cuts remains an encouraging factor, but it may already be priced in to current developments. Additionally, the full impact of higher US tariffs – which effectively a tax on consumption – has yet to make its impact on data pertaining to inflation and consumer demand. As such, our strategy must remain cautious in tenor.

What are Goodbody’s current recommendations?

• In respect to the allocation of assets, we are still maintaining benchmark levels in risk assets, as we do not consider the year’s economic cycle to be undergoing major disruption. However, we do expect challenges in the coming months, and so have shifted to a more defensive posture in our equity exposure.

• In fixed income investments, we favour short-term corporate bonds over government-issued bonds, given the worries about rising state debt and the global factors that may affect income yield from longer-duration bonds.

What new information was released last week?

• On the economic front, the key data releases last week were the US inflation reports. The Consumer Price Index (CPI) showed a modest increase in core inflation to 3.1% year-on-year, but core goods prices rose just 0.12% month-on-month, suggesting that tariffs have had a limited impact so far. The Producer Price Index (PPI) was slightly more favourable, declining month-on-month in August due to weaker service prices, while core goods inflation was in line with expectations at 0.3%.

• Outside the US, China’s trade data showed disappointing results, with imports and exports falling short of forecasts and therefore highlighting continued weakness in the country’s domestic economy. In Europe, the ECB Governing Council met and left interest rates unchanged in a unanimous decision. It revised its growth forecast for 2025 slightly higher, while trimming its 2026 outlook. Inflation projections for 2026 and 2027 were lowered slightly, with President Lagarde noting that policy remains appropriately positioned. Importantly, the ECB now views risks to growth as balanced, a shift from its previous downside bias, and reaffirmed its readiness to support market stability amid recent turbulence in French bond markets.

The week ahead: what to watch out for

This week’s important news will come from the regular meeting of the Federal Open Market Committee (FOMC), the policy-making body of the US Federal Reserve. Otherwise, the main data releases will focus on retail sales and industrial production, including in the euro area. Policy meetings will also be held by the Bank of England and the Bank of Japan.