Earnings growth wrestles inflation for control of market narrative

Investors anticipating that recent interest rate cuts in North America and Europe will drive a rotation from bonds to stocks, especially emerging markets stocks, were partially vindicated in late September when EPFR-tracked Emerging Markets Equity Funds posted their second-largest weekly inflow of the year.

In the wake of the Federal Reserve’s first interest rate cut in over four years, US equity markets hit fresh record highs and collective flows into US-mandated Equity, Bond and Money Market Funds tracked by EPFR totaled over $160 billion. The bulk of that fresh money, however, was absorbed by US Money Market Funds.

The final day of the latest reporting period, which coincided with the US Federal Reserve’s first interest rate cut since March 2020, saw flows into all hit their highest daily total since mid-July. That lifted the headline number for the week ending Sept. 18 to a two-month high. Fed policymakers trimmed their key rate by 50 basis points following a string of relatively benign inflation reports and some less benign labor market datapoints. Although the latest flow data captures more of the anticipation than the reaction, an influx of fresh money at the end of the week lifted Emerging Markets Bond Funds, Global Equity and Technology Sector Funds into the inflows column.