The form and magnitude of the rally did surprise me, especially since it's not necessarily fundamentally justified. Especially in Europe, where the situation may be a bit worse than in the United States. In the US, there was bigger boost to the economy via larger stimulus packages and fiscal programmes, which are now being reflected in significantly better economic data.

So the main criterion for these last few months, or the last one and a half years, has been the significant liquidity flowing into the markets through government measures, which then sought investment opportunities. And all this in an environment of rising interest rates. On the one hand, central banks have aimed to combat inflation by raising interest rates. But on the other hand, the significant fiscal influence of governments has counteracted this, making combating inflation difficult.

There is still a large amount of liquidity, including record amounts in the money markets. But a few uncertainties have emerged, particularly geopolitically, especially in the Middle East, where the situation has become even more precarious. Was that the end of the rally for good? That can never be said with certainty, because there is so much money waiting on the sidelines. The time for a correction would certainly be appropriate, given that the markets have risen significantly recently. Specifically in the US, certain valuation criteria have been exceeded, which go beyond what is normal for the overall market. In Europe and Asia, there is still some room for valuation adjustments, but the economic conditions and fundamental prerequisites from the economic side are not as good.

Big Tech and AI were the major market drivers. Many companies are now gearing up, buying servers, or buying chips from Nvidia, which has brought about a kind of boom, and ensured that the US in particular has a two tier market. Of the „Magnificent Seven“, only five to six are actually left. Tesla is now out of the picture, and Apple has also recently declined.

They have very resilient business models, and have built such strong competitive barriers that it's difficult for others to replicate them. Microsoft or Amazon took years, and decades, to achieve their current market positions. Nvidia is a bit different. The semiconductor segment is still cyclical. But Nvidia has built up enormous competitive advantages through graphics designs, which are especially needed in the AI ​​field. The competitors are very strongly in pursuit, trying to catch up and eventually compete with Nvidia. But we're still a long way from that point. Nevertheless, the valuations are ambitious, and in a market correction phase like the one we are currently experiencing, Big Tech is likely to lose disproportionately. The tech hype may continue for a while due to liquidity reasons, but I fear that especially in the AI ​​sector, some expectations may prove to be too high.

I completely agree. Nvidia is a phenomenon because it generated great expectations but has always delivered. The P/E ratio was over 200, but has been as low as 50 this year. Nvidia has always grown into its valuation. The company has worked its way to the top of the Trillionaires Club. But they have also had a bit of luck that these graphics chips, which used to be used only in game consoles, are particularly suitable for AI applications. At the moment, the demand for these chips is so immense that they are sold out for months.

Nvidia has been the huge winner on the markets in recent years. But the competition doesn't sleep. It will take some time for Nvidia to be caught up with. Nonetheless, it is unlikely that this demand will continue to develop so consistently. Eventually, all data centres will have these chips. I trust Nvidia to meet this demand for another two or three quarters, but disappointment will come sooner or later. I'm sure about that.

That will take some time. The gigacaps have the advantage that they could use the current interest rate situation at the short end for their cash reserves. They made a lot of money by investing these cash reserves at the short-term rates set by the Fed, which were at 5.3%. This is not the case for mid and small caps, as they do not have large cash reserves. The higher interest rates affect them much more negatively, in the way they are supposed to. The Fed doesn't raise interest rates for fun. It has to slow down the economy and inflation. In my opinion, it is likely that the Fed will not cut interest rates at all this year, because the timing around the presidential election is considered too delicate. Additionally, it's likely challenging for them to justify such a move much earlier, due to the fundamental market conditions. As long as interest rates remain at current levels, it will remain difficult for small and mid caps.

I also constantly ask myself that question. I didn't really expect the ECB to go its own way ,without the Fed leading. Historically, there is only one cycle where the ECB acted completely independently of the Fed. That was in 2011 when it raised interest rates, only to have to completely reverse course shortly afterwards because of the euro crisis. You can therefore not consider this „experiment“ to have been particularly successful.

If I interpret Mrs. Lagarde's statements correctly, she has more or less hinted at a rate cut for June, if nothing significant changes. Fundamentally, a rate cut would be warranted. The economic situation, the better inflation data, and the forecasts would justify it for the ECB.

I would have spontaneously named those two, especially the latter. I believe commodities can also be very helpful as an inflation hedge for a portfolio. We are currently experiencing the great project of the energy transition. We are seeing large infrastructure projects where commodities play an enormous role. And in recent years, I would almost say the last decade, we have not invested enough in commodity extraction. Capacity has not been developed. That means we are now dealing with a restrictive supply situation. The argument I always refer to is that we are entering an era of scarcities. These scarcities will occur in very different areas and markets. This also has a bit to do with national policies, with the re-onshoring of certain production parts, or elements of production chains. A shift away from globalisation, which made everything available cheaply at any time.

Yes. We have now seen shortages again in the energy sector. Because of the situation in the Strait of Hormuz, through which about one quarter of all global oil passes. In addition, OPEC is keeping its supply restricted, and is not putting as much onto the market as is needed. This scarcity of commodities leads to price increases.

I also find healthcare very interesting. This is a topic that goes hand in hand with demographic development, and is something that has been somewhat overlooked in the recent years of tech dominance on the markets. Infrastructure is certainly an interesting area as well. I am referring to energy supply, healthcare, transportation routes. A lot of money will flow into these areas in the coming years. In that respect, I certainly identify several winners.

We re planning with various scenarios. In his first term, Trump rolled back regulation. This is an issue that is not now as high on the agenda for the Republicans. Moves here would particularly affect the financial sector. The big banks would benefit from it. Whether this is sensible is another question. We saw a banking crisis in the US about a year ago, which also had to do with the fact that parts of the regulations were not as restrictive.

Traditionally, this also includes fossil fuels, energy supply. Trump doesn't want an energy transition, he wants to continue with what is there – oil, gas. Also, the classic automotive sector, the American energy-consuming large-volume vehicles, might experience a small renaissance.

Conversely, anything related to green energy. Alternative energy production is not a topic for Trump. But the tech sector could also be negatively affected. Trump has expressed his displeasure with it several times. This also has to do with personal relationships with some CEOs of the major tech companies. Nevertheless, betting on the positioning of a US president can also backfire.

Looking back at Trump's first term, the fossil sector clearly went down. The price of oil hit a low point during his term, and the valuations ​​around this sector performed very negatively. It was exactly the opposite under Biden. Suddenly, green technologies collapsed, and fossil fuels rose due to many crises. While under Trump, alternative energies performed well because the sustainability movement was very strong worldwide. Therefore, I generally advise against basing a portfolio position solely on the outcome of an election.

Partly. India has even higher valuations than the US. But a valuation as such is not the reason why markets keep moving upwards, or why they stop. In the short term, India has reached a valuation point that is ambitious. However, if you look at India's development from an economic perspective and consider the potential in India, then you have to say that, in the long run, this is still an extremely attractive market. India is where China was in terms of GDP in 2006 or 2007. Thus, we are several years, if not decades, behind what happened in China. And that is the perspective that an investor seeking longer term growth opportunities should take. If you look at the growth profiles for this year and next year, India is still at the top.

If the political levers continue to be available, i.e., if Modi has the chance to further advance reforms after his reelection this year, then I believe that despite a high valuation of the stock market, India will be a good market for investors. However, such markets are always vulnerable, especially in the current market climate, which is practically crying out for corrections. In this context, high valuations are of course punished first. Nonetheless, that should not disguise the fact that it is still a very attractive market in the longer term.

Carsten Roemheld has been a capital market strategist at Fidelity International since 2014. In this role, he often talks on TV and radio about current trends in the capital market, central bank policy, or important macroeconomic influences and their impact on global financial markets. In addition to his own blogs and podcasts, he has established a successful webinar format that is streamed live to customers every two weeks.