Market Musings 260725: Broadening out of global stock momentum

Market Musings 260725:
Broadening out of global stock momentum

The stock bull market continues for now: US, UK, Japan

1. US, UK, Japanese stock markets all make new highs

Despite the evident expensiveness of the US stock market, the equal-weight S&P 500 made a new all-time high this week - so not just powered by the likes of Nvidia, but rather a broad-based advance by the majority of US large-cap stocks across different sectors including not just Technology, but also Financials, Industrials and Utilities.

Macro liquidity in the form of M2 money supply growth remains strong, while US Q2 corporate results have also in general bettered consensus expectations. Note that the valuation of the S&P 500 equal-weight index is a lot lower at 17x forward P/E than that of the classic S&P 500 index (22x P/E), given the lower bias towards highly-valued Technology stocks in the equal-weight version.

US S&P 500 equal-weight index hits a new all-time high

Both the UK FTSE 100 and Japanese TOPIX indices also hit new highs, in the case of Japan buoyed by the news of a trade deal with the US (at 15% average tariff on Japanese exports to the US, not actually that good a deal in my view). Ultimately, the removal of uncertainty is good news for Japanese exporters, most of all for the car companies Toyota, Honda and Nissan.

Japanese TOPIX index breaks new highs post US trade deal

The FTSE 100 index of UK large-cap stocks continues to catch up to the rest of Europe, returning 13% including dividends so far this year. UK banks such as Barclays and NatWest continue to lead the UK higher off the back of strong Q2 results which included further share buyback announcements.

FTSE 100 hits a new all-time high as banks perform well

2. US dollar: is the temporary rally over already?

Over the first half of July, the US dollar had arrested its decline and had even rallied modestly against other major currencies. However, this countertrend rally may now be over, with the euro in particular beginning to strengthen once again.

DXY US dollar index resumes its decline after a small bounce

While the euro has rallied, gold is marking time for now in the $3300-3400 range, albeit after a massive run-up both last year and this.

I remain confident of higher gold prices ahead as the US dollar looks likely to resume its decline. Central banks around the world continue to be substantial buyers of physical gold, while Asian retail investors have also become a new source of buying of both physical gold and silver in recent weeks.

Watch the gold miners sector closely - we have seen strong Q2 results from gold mining heavyweight Newmont Mining, which should lead the GDX Gold Miners ETF higher. Note how the GDX ETF has outperformed the gold price of late (the GDX/GOLD ratio is shown in green in the chart below). Finally, the operational leverage of gold miners to higher gold prices is becoming evident in their results and in their free cash flow, which is going to paying higher dividends, paying down debt and even buying up smaller gold miners to consolidate the sector.

GDX Gold Miners look set finally to outperform the underlying gold pricer

3. Energy security prompts buying interest in clean energy, battery storage and nuclear power

The continued growth in US and global energy demand plus the renewed focus on energy security post the Ukraine conflict-related surge in oil & gas prices continue to power rallies in the clean energy, battery storage and nuclear power themes.

The L&G clean energy ETF has continued to power higher, now up 47% in USD since the April low, even beating the 42% rebound in the Magnificent 7 mega-cap tech stocks over the same 3-month period.

Battery storage is a particular area of strength within clean energy, with the L&G battery value-chain ETF breaking to a new 2-year high on the back of increased demand for industrial battery storage twinned with solar panels, in order to provide a more constant flow of electricity to the grid over time on an economic basis.

Nuclear power and uranium miner ETFs also hit new highs, as the positive newsflow around nuclear power continues. New nuclear power generation installations plus restarts of idled reactors are being announced on an almost daily basis, while electricity demand in the US and elsewhere continues to grow.

Have a good week

Edmund