World shares have hit fresh record highs in recent days, defying forecasts for a pullback and looking much stronger than many predicted a few months ago.
The MSCI All Country World Index ended last week up 13.2 per cent in 2025, and more than 40 per cent higher than two years ago.
I should note that we haven’t seen this same strength here in New Zealand, with the local sharemarket down slightly in 2025 and still 16.6 per cent below its record high from early 2021 (when dividends are excluded).
The lagging nature of domestic assets (including residential and commercial property, as well as shares) is a story for another day.
However, when it comes to global shares the bull market is back on.
Here are five reasons why investors are in such good spirits.
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Corporate earnings have been exceeding expectations.
The international reporting season for the June 2025 quarter is close to wrapping up now, and the results we’ve seen over the past 3-4 weeks have been impressive.
With some 90 per cent of S&P 500 companies in the US having reported, more than 80 per cent have beaten earnings estimates.
More importantly, the aggregate earnings growth rate (compared to the same quarter a year earlier) was 11.8 per cent.
That’s well above the 4.8 per cent that was originally expected, and it’s the third consecutive quarter of double-digit earnings growth.
Markets are confident the Federal Reserve will soon resume its easing cycle.
The Fed meets next month, and investors are hopeful about a potential interest rate cut.
US inflation was softer than expected in July, prompting this renewed optimism.
While there was evidence of tariff-induced price rises in some categories, such as household furnishing and apparel, it wasn’t significant.
The upper bound of the Fed Funds Rate (it sets a target range, rather than a specific point like our OCR) is 4.50 per cent.
That’s down from a peak of 5.50 per cent, although it hasn’t changed since late last year.
Markets expect a 0.25 per cent cut at the upcoming meeting, and three more by the middle of next year.
That would be a positive for the US economy, borrowing costs and for risk assets like shares.
The AI trade has returned with a vengeance.
In mid-April, the so-called Magnificent 7 had slumped 25 per cent, while the other 493 stocks in the S&P 500 were down just 10 per cent.
The AI trade looked to have done its dash, and it appeared that this dominant part of the US market would hold it back in the coming months.
Sentiment has flipped since then, in part due to some exceptionally strong earnings releases and due to newfound confidence this theme will continue to drive economic growth and productivity gains.
Since April the Mag 7 basket is up 50 per cent, while the other 493 have struggled to keep pace with “just” a 22.6 per cent gain.
The global economy is proving resilient.
The US labour market has softened and Chinese indicators have been mixed, but it’s a slowdown we’re seeing rather than a collapse.
Meanwhile, economic growth has been stronger than expected in Japan and the UK, while investors are getting increasingly upbeat on the prospects for Europe.
The bloc is looking more unified and integrated, while fiscal policy (driven by German stimulus) is becoming more accommodative.
While the US market gets all the attention, some of the biggest sharemarket gains in 2025 have come from emerging markets (up 18.3 per cent), the UK (up 11.8 per cent) and Japan (up 11.6 per cent).
Tariffs and trade tensions are past the worst.
US tariffs will be a headwind to growth in the world’s biggest economy, while also putting upward pressure on inflation.
However, at least we know where we stand now (for the most part) and can plan for life after Liberation Day.
The average US tariff rate has jumped to the highest in decades, but most countries have ended up with an outcome better than worst case scenarios.
The situation with China remains unanswered, but hopefully the second three-month extension of 2025 signals a constructive relationship, and maybe some potential for a better-than-expected result.
US midterm elections take place in 2026, with all 435 seats in the House of Representatives and 35 of the 100 seats in the Senate to be contested.
One would think President Trump and his Republican colleagues will want tariff talk to be behind them as we head into this period, with the focus having shifted to more positive themes, such as tax reductions and deregulation.
Is this recent strength justified?
The global economy is proving resilient, corporate earnings are strong, inflation remains contained and we’re likely to see interest rates come down steadily in the months ahead.
Bumps along the road are inevitable, but that’s a recipe for solid returns.
Markets are looking past the political noise, concern over rising valuations and the usual list of things to worry about, and choosing to focus on those positives.
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Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.
Mark Lister
Investment Director
Market Insights enewsletter
Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.