Equity strategy and market outlook – March 2024

Welcome to the March edition of Edison Insight. This month we open with a strategy piece by Alastair George, who believes that monetary policy is now set to ease in Europe and the US over the next six months. Futures markets are pricing 75bp of interest rate cuts on both sides of the Atlantic. The debate on monetary policy now revolves around how fast, rather than whether, interest rates are cut in response to declining inflation. Below-trend but positive economic growth puts a floor under corporate earnings forecasts. Furthermore, purchasing managers’ indices in Europe and the US are on a clearly improving trend. An acceleration of economic growth suggests upgrades to profits forecasts may become more frequent during H2. However, a strong start for global markets in 2024 leaves equity valuations at the top of their historical range. In credit markets the US high-yield bond spread is 3.15%, close to the lows of its 20-year trading range. As a result, we believe medium-term returns on equity and credit are likely to be correspondingly modest, but acknowledge market momentum in the short term remains strong. We maintain a neutral outlook on global equity markets. The supportive ‘Goldilocks’ thesis of ‘just right’ growth remains unchanged during March. However, 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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