The first half of 2024 was marked by an artificial intelligence-driven jump in stock markets, volatility in bond yields, and political uncertainty, according to analysts at UBS.
So what does the third quarter have in store for investors? In a note to clients on July 1, the analysts outlined several key themes they will be focusing on during 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 are wondering about the staying power of a tailwind that has lifted a relatively small number of stocks related to the nascent technology.
Part of this worry, they added, stems from a recent dip in shares of Nvidia (NASDAQ:NVDA) after the AI-poster child touched a record high level and briefly became the world's most valuable company by market capitalization in June.
Despite the uncertainty, the analysts said the AI segment "currently offers the best mix of attractive and visible earnings growth profiles, strong competitive positioning, and a reinvestment runway." As a result, they are particularly bullish on semiconductor firms.
Outside of AI, the analysts also predicted that the Federal Reserve will likely begin to ratchet down rates in the second half of 2024.
Minutes released earlier this week from the Fed's June policy gathering showed that officials were reticient to begin to slashing interest rates down from a more than two-decade high range of 5.25% to 5.5% until they had seen more evidence of waning inflation. However, the analysts argued that data on both inflation and economic activity "have been supportive of a loosening in financial conditions."
They are predicting that the Fed will roll out two rate cuts this year, with the first in September.
In terms of specific asset classes, the analysts added that they view gold as a hedge against ongoing geopolitical tensions and "election-related fears around factors like Fed independence."
They projected that gold prices will rise to $2,600 per ounce by the end of the year and $2,700 an ounce by mid-2025. Spot gold was trading at $2,364.07 per ounce at 06:48 EST (10:48 GMT) on Friday.
Elsewhere, they said there is now an "attractive entry point" for investors looking to move into fixed income from cash prior to an expected decline in yields stemming from the Fed's anticipated rate cuts.
"If the Fed pivots in September, as we expect, U.S. Treasuries should rally as the market shifts its attention to the magnitude of rate cuts not only this year, but also next year and beyond," the analysts said.
Finally, U.S. politics will be a key theme for markets, especially after a disastrous debate performance by President Joe Biden last week cast doubt over his ability to stay in the race for reelection. At the moment, polls suggest that the November vote will result in a so-called "red sweep", with Donald Trump regaining the presidency and Republicans taking control of both chambers of Congress.
In such a scenario, the analysts recommended having "sufficient exposure to financials", noting that these companies would benefit from conservative lawmakers lowering industry regulations. On the other hand, they expressed some caution around consumer discretionary and renewable energy names, saying they "could lag" in the event of a red sweep.
