Equity strategy and market outlook – February 2024

Alastair George believes that investors are sensing that the inflation genie has miraculously been put back in the bottle without causing a major financial accident or recession. US equities continue to lead global markets higher despite extended valuations, driven by a strong earnings season. Below-trend but positive economic growth represents the ‘Goldilocks’ scenario for investors in 2024. The absence of a recession in 2023, and more recently improving growth momentum in both Europe and the US, puts a floor under corporate earnings forecasts. Yet with growth still below trend, there is increasing slack in the economy, building the case for interest rate cuts later in the year. However, stronger economic growth prospects and stubbornly high inflation readings have left global government bonds in limbo. US two-year interest rates have risen as markets reappraise overly bullish expectations for US Federal Reserve rate cuts. Nevertheless, financial conditions overall have been loosening as credit market conditions have eased. Since Q323, the US high-yield bond spread has fallen sharply and at current levels of 3.2% is close to the lows of its 20-year trading range. We maintain a neutral outlook on global equity markets. ‘Goldilocks’ may be supportive but equity valuations have already risen to discount the positive factors in play during 2024. We believe it may be time to consider taking profits in growth segments of the market, despite currently positive earnings momentum. For bonds, we believe that US 10-year yields of 4% or more will offer diversification benefits in the event of any unanticipated slowdown, while yields are likely to trend lower as interest rates and inflation fall later in the year.

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