Key Takeaways

• Investor sentiment and market momentum have markedly improved in the past quarter, driving equity valuations to loftier levels, specifically in U.S. Large Caps. Other asset classes such as Small Cap and Non-U.S. equities offer more attractive relative returns.
• Economic fundamentals remain mixed, with strong employment data persisting while corporate profit growth has softened in the past three quarters despite falling inflation.
• We believe central banks are nearing the end of their tightening cycle, as inflation continues to cool, but future interest rate cuts remain far off in the distance given solid GDP growth.
• A slowdown in private market exit activity has led to a slowdown in fundraising activity and therefore a reset in private market prices. This may well pave the way for more robust returns for those that have the capacity to deploy into private equity and credit markets.
• The greatest risks in the marketplace surround the need to refinance debt in the near term given more onerous borrowing rates. In addition, tighter lending standards raise the probability of choking off economic activity.  Though the risk of recession may be reduced, we believe stretched valuations increase the risk of a normal market correction.

July saw strong equity performance, with the S&P 500 up 3.2% and the tech-heavy Nasdaq up over 4.0%. Small caps outperformed large caps as energy and financials rebounded. Credit continued to perform well vs. less risky bonds, with high yield bonds and EM debt returning +1.4% and 3.0%, respectively. The US economy grew +2.4% in Q2, driven by strong business investment and consumer spending, but job growth was tepid after adding only 187k jobs which was less than expected.

Global equity markets posted another quarter of positive gains, continuing their impressive rally off the lows from last October. Reflecting on the first half of the year, one of the biggest surprises has been the strength and durability of the US economy.  However, the outlook for the global economy remains highly uncertain.