Market update – December 2024
Insights — January 2025
We share our latest observations on global asset markets in relation to T8 Energy Vision
All movements are expressed in United States (US) dollar terms, unless otherwise stated.
Key points
- A shift in monetary policy expectations (slower pace of rate cuts) resulted in a sharp increase in bond yields and a broad-based selloff in global equities.
- Our ongoing research indicates that the US has increasing demand for electricity for the first time in 20 years driven by data centres.
- We have a very optimistic outlook for electricity demand and all electricity generation technologies, their supply chains and associated infrastructure.
- We upgraded our outlook for electricity demand growth following Trump’s election victory (on the basis that anticipated cuts to regulation will result in data centres being built more quickly).
- Falling interest rates (100 basis points of cuts so far) are yet to have a material impact on our focus area of the electric energy sector and its supply chains (which have historically displayed very high sensitivity to interest rates). We believe that this lag is explained by uncertainty following the US election and will prove temporary.
Market update
A shift in monetary policy expectations (slower pace of rate cuts) resulted in a sharp increase in bond yields and a broad-based selloff in global equities which was a headwind for future energy stocks.
Macroeconomic data
While the US Federal Reserve cut interest rates at its December meeting (a cut of 25-basis points taking the target rate to 4.50-4.75%), this was overshadowed by comments regarding the outlook for interest rates which indicated fewer rate cuts than previously expected in the near term. The Fed ‘dot plot’ now projects two interest rate cuts in 2025, down from the four it had forecast in September, with Chair Jerome Powell stating that the Fed can now “exercise more caution” when considering further adjustments to the policy rate.
The key factors behind this position are sticky inflation, low unemployment and the strong economy. Inflation and unemployment data reported during the month was more or less on trend and in line with consensus expectations with the Core Personal Consumption Expenditures Price Index (Core PCE) steady at 2.8%, unemployment slightly higher at 4.2%. US gross domestic product (GDP) came in stronger than expected at 3.1% quarter-over-quarter annualised relative to consensus at the prior reading at 2.8%, indicting the US economy remains strong.
Market impacts
Treasury yields continued on their upward trajectory with 2-year, 5-year and 10-year US Treasuries ending the month at 4.24%, 4.38% and 4.57% or 9, 33 and 40 basis points higher month-over-month. Noteworthy is the fact that this indicates that the yield curve has normalised (for the first time since prior to the interest rate hiking cycle) which indicates lower likelihood of a recession. The Global Aggregate Bond Index (-2.1%) followed treasuries lower and the US dollar continued its upward trajectory (US Dollar Index +2.6% to 108).
Global equities (-2.7%) sold off, driven by the US stock market (S&P 500 -2.5%) which fell from all-time highs. Elsewhere the trend was more positive with moderately stronger markets in Europe (Germany +1.4% and France +2.0%) and in Asia (Hong Kong +3.3%, and Japan +4.4%).
The mega-cap technology stocks bucked the trend in US stocks (the Magnificent Seven Index +6.3%), with Tesla (+17.0%) and Google (+12.0%) the strongest contributors. The magnitude to which these stocks are distorting US and global equity indices (US stocks account for approximately 70% of the MSCI World Index) is gaining more attention. These stocks presently account for approximately one-third of the total market capitalisation of the S&P 500 Index (an increase of more than 50% over the last two years). The equal weighted S&P 500 (-6.4%) and MSCI World (-4.3%) fell considerably further than headline market capitalisation-weighted indices, which emphasises the distortion.
At sector level, materials (-10.9%), energy (-9.6%), real estate (-9.1%), industrials (-8.1%) and utilities (-8.1%) were the worst performers. None of these sectors have any exposure to mega-cap technology stocks.
At factor level, small caps (-8.4%) underperformed large caps (-2.9%) at headline index level, however the equal weighted index returns were comparable (equal weighted Russell 2000 and Russell 1000 were both -6.7%) which underscores the distortion being caused by the mega-cap technology stocks. Growth stocks (+0.8%) outperformed value stocks (-7.0%) which is the result of the fact that mega-cap technology stocks are all classified as growth stocks.
Future energy stocks
The Clean Energy Index (-6.7%) fell in line with US equity markets. The solar, critical materials and utilities segments (which account for more than 50% of the index) were the key detractors with solar (-9.7%) detracting 163 basis points, critical materials (-15.8%) detracting 160 basis points and utilities (-5.3%) detracting 146 basis points.
While the performance of critical materials followed its broader sector (described above), we believe the performance of the solar and utilities segments was related to the perception that renewables are under pressure and the future of electricity will be all nuclear and gas-fired (Donald Trump’s “drill, baby, drill” comments). Our research indicates that an ‘all nuclear and gas’ scenario is implausible, and we have published a short summary of our expectations for the future energy mix in the US.
Looking ahead, we have a very optimistic outlook for electricity demand (the US has increasing demand for electricity for the first time in 20 years driven by data centres) and all electricity generation technologies, their supply chains and associated infrastructure. We have upgraded our outlook for electricity demand growth following Trump’s election victory. We also reiterate that falling interest rates are yet to have a material impact on our focus area of the electric energy sector and its supply chains (which have historically displayed very high sensitivity to interest rates). We believe that this lag is explained by recent policy uncertainty (especially up to and following the US election) which has temporarily obscured the impact of this significantly positive catalyst.