Global financial markets experienced mixed performance last week, with equities posting gains in developed markets while emerging markets and defensive sectors lagged. The ongoing tug-of-war between resilient economic data and persistent inflation concerns continued to drive sentiment.

In the US, the S&P 500 is up by more than 1% for the week, buoyed by strong corporate earnings and signs of a robust economy according to the latest manufacturing indices. However, minutes from the Federal Reserve's latest meeting hinted at lingering uncertainty over the inflation trajectory, tempering enthusiasm for more aggressive rate cuts. The tech-heavy Nasdaq Composite reached new record highs, rising 1.2% in a clear signal that the AI-driven boom shows no signs of abating.

 The brightest moment of the week was once again due to Nvidia, the semiconductor giant at the forefront of the artificial intelligence revolution. The company reported record quarterly revenue and profits that surpassed even the most optimistic Wall Street expectations, driven by surging demand for its AI chips. Nvidia's shares have skyrocketed this year, adding over $700 billion in market value and making it the world's most valuable chipmaker. However, while Nvidia's results have been nothing short of remarkable, some investors worry that the stock's meteoric rise may have gone too far, too fast. The company's valuation now implies a level of growth that may be difficult to sustain, especially if the AI hype cycle cools or if competitors manage to chip away at Nvidia's dominant market share. As such, even as Nvidia's success story captivates the market, prudent investors are likely to approach the stock with a measure of caution, balancing its undeniable momentum against the risks of buying into a potentially overheated trade.

European stocks had a more subdued week, with the Euro Stoxx 50 and FTSE 100 slightly down. Investors weighed the impact of stubbornly high core inflation against the backdrop of a mild economic recovery. In the Asia-Pacific region, Japan's Nikkei 225 gained, while China's SSE 180 index fell as concerns about the pace of the post-COVID rebound persisted.

The Australian market slipped  last week before getting back just into positive territory on Monday. Weakness in the energy (-1.6%), consumer discretionary (-1.8%), and telecom (-3.7%) sectors offset gains in materials (1.1%), IT (2.1%), and utilities (2.0%). Small caps underperformed, with the S&P/ASX Small Ordinaries index down 1.0%.

In the fixed income space, Australian bonds outperformed their global peers. The AusBond Composite index rose slightly, while global aggregate bonds were flat. Credit markets saw modest gains, with global investment-grade and high-yield indices flat. The US 10-year Treasury yield started top rise again, reflecting the market's ongoing assessment of the Fed's rate path.

Among so-called real assets, global listed property and infrastructure struggled, with the S&P/ASX 300 A-REIT index and the FTSE Global Core Infrastructure 50/50 index both declining 1.0%. Commodities were mixed, with the S&P GSCI index gaining 0.4% in USD terms, driven by a 4.4% surge in natural gas prices. However, oil markets retreated, with WTI crude down 1.4% for the week. Gold lost some of its shine and gave back a few percent of this year's gains.

As we head into a new week, market participants will closely monitor incoming economic data and central bank commentary for clues on the future direction of monetary policy. With inflation proving stickier than anticipated and growth showing signs of resilience, the path to a soft landing appears increasingly narrow. While the current market environment presents opportunities, smart investors are treading cautiously and avoiding outsized bets. As Nobel laureate economist Paul Krugman stated last week, he is "fanatically confused" about where interest rates are headed. Krugman argues that one could make a strong case for rates either returning to their pre-pandemic levels or settling higher, noting that anyone expressing confidence in either scenario is "delusional.” In this week’s video Andrew Hunt strikes a similar tone and, for our part, we are also cautious about taking large relative positions even if we feel we are starting to get an inkling about the direction of travel. That means it is a good time to be thinking about scenarios and what you might need to do with portfolios if the global economy starts to lurch one way or another.