Last month we wrote that the growth engine underneath the market was broadening. In August, the market finally started to reflect it. Shares rose across regions, styles and company sizes, carried by a strong Q2 reporting season and resilient economic data, with profit growth broadening beyond just the AI names. Some of the companies that dragged most on performance over the last year were among the strongest performers in August.
Market recovery continues in August
Global shares continued to push higher in August, rising 2.5% for the month, and bringing the year-to-date gain to 12.6%. The gains this month have become increasingly widespread. Japan led the performance of developed markets, up 3.9%. Notably, both growth and value stocks each returned 2.6%, a dead heat after two years in which growth has usually won by a distance. Smaller companies also outperformed larger ones, gaining 2.9% globally.
While the index has been carried by a handful of large tech companies in recent years, this dynamic has started to change.
Earnings did the work, and software was the surprise
The broadening had a fundamental underpinning: profits. The second quarter reporting season finished strongly over the month, and the good news extended well beyond the handful of AI-related companies that have driven much of the market’s earnings growth. Energy had the highest proportion of companies beating expectations, while more than 70% of companies in communication services, technology and consumer discretionary also outperformed analyst forecasts. Financials, industrials and utilities were not far behind. That gave investors more reasons to look beyond the market’s recent winners.
Technology still delivered, but the surprise was where that strength showed up. Semiconductors bounced back after July's sell-off, but software did much better. Through the middle of the year, software companies were sold heavily on fears that AI would erode their businesses. If software can be written cheaply and quickly by AI, perhaps the companies selling it are in trouble? The results told a different story, with demand holding up. Salesforce, which we hold in our portfolios, was among the companies whose forecasts pushed the sector higher late in the month.
A case in point: Xero
Xero is the clearest example. The shares fell hard through the first half of the year, caught in the same AI-driven fears, alongside questions about the returns on its acquisition of the payments business Melio. By late July almost 5% of its shares had been sold short, a record for the company. The market was not simply doubting it, it was betting against it.
Despite market concerns, the business continues to grow strongly and execute on their strategy. Recent company commentary and results suggest that demand remains strong, and Xero's August AGM and Xerocon presentations reinforced confidence in its medium-term outlook and US growth aspirations. Through August, shares rebounded over 20% from their July low. Through all the noise the business kept performing, and the fears that drove the sell-off still look materially overdone.
Higher yields remain the challenge
In late July, long-term yields had climbed sharply even as short-term yields fell, reflecting growing unease about inflation, fiscal policy and how the US Federal Reserve might respond. Those pressures did not disappear in August. Treasury's decision to expand buybacks of long-dated bonds provided some temporary relief, but 30-year yields subsequently climbed back to their highest levels since 2007. Meanwhile, Kevin Warsh's Jackson Hole speech pushed markets towards expecting rate rises rather than cuts. With government borrowing still high, inflation proving stubborn and oil prices elevated, pressure on long-term bond yields remains.
Ten-year yields hit fresh cycle highs in several countries, and in Japan reached their highest levels in decades. For bond investors, that has been a grinding experience. But the same rise in yields that has hurt returns also means investors are now being paid considerably more to own bonds, improving the outlook for returns from here.
What it means for investors
With the market seeming to become more focused on fundamentals than narratives, we believe being extremely selective as an investor will become increasingly important. The rising tide is no longer lifting all boats equally. Whether you are investing in stocks or bonds, being clear on what you own and why you own it is again becoming critical.
The lesson of the past two months is not that patience always pays. What made the difference was going back through the case, testing it against the thing everyone was afraid of, and finding it still stood. Selling in July would have felt like relief at the time. It would also have crystallised the loss and meant missing what came next.
That showed up in returns. In August, all of our equity and KiwiSaver funds outperformed their benchmarks.
One good month proves very little on its own. The hard part is the judgement in between: knowing when a falling share price is telling you something, and when it is only telling you that other people are frightened.
Talk to us
If you’ve got questions about your investment, our friendly team are here to help. You can drop us an email, call us on 0508 347 437, or chat with us online.
