Our macro outlook reflects a soft landing where US inflation and growth moderate and the Fed begins cutting rates in September. We favor quality bonds and remain neutral on US equities. (UBS)

We recommend:

  1. Position for lower rates: Use available pockets of liquidity to fund positions in quality bonds and capture carry.
  2. Seize the AI opportunity: Strong first quarter earnings from big tech companies underline our conviction that the AI growth case remains intact.
  3. Prepare for the US election: Investors should vote at the ballot box and not with their portfolio. However, the election will affect markets, and investors should be aware of potential risks to their wealth.

Our central view:

Base case: A “soft landing,” with the Fed starting to trim rates as growth and inflation cool off. Our central scenario is that Fed will cut a total of 100bps this year, with the first easing move in the September meeting. As a reference, considering there's only three FOMC meetings left in 2024, our base case assumes that the Fed cuts by 50bps in one of these meetings before year-end.


Asset class views:

Given the repricing that has taken place in the rates market, we now see limited scope for capital gains in bonds. So we are downgrading Fixed Income to Neutral from Most Preferred. Moreover, we keep US equities Neutral, but acknowledge that they have a constructive backdrop.


Fixed income: We remain Most Preferred in (IG) corporate bonds, and agency MBS, but we are downgrading Investment-Grade CMBS to Neutral from Most Preferred.


Equities: We see modest upside overall, and focus on capital preservation strategies and selectivity.

  • US equities: We maintain our year-end S&P 500 target at 5,900. We believe the backdrop for US stocks is constructive, given solid earnings growth, AI tailwinds, and likely rate cuts before year-end.
    • Style: Neutral on value versus growth.
    • Size: We are also Neutral on US small caps relative to US large caps. Having said that, we believe small-cap valuations are very attractive both relative to their own history and versus large caps.
    • Sectors: Most Preferred—information technology, financials, and utilities. Least Preferred—materials and real estate.
  • UK equities: We are downgrading UK equities to Neutral from Most Preferred given recent outperformance. The underlying backdrop remains supportive though, with domestic growth gradually accelerating and the Bank of England easing financial conditions. The UK's combination of relatively high-quality and defensive businesses can also prove to be relatively resilient in periods of uncertainty as we have seen in July and August. We advise broad-based exposure to the UK.
  • EM equities: Neutral. By geography, we rate the Philippines and South Korea as Most Preferred. We favor ESG leaders for their ability to mitigate downside risks and for their attractive valuations. Key risks to the asset class include a strong US dollar, an uptick in geopolitical tensions, and a sudden worsening in US macro performance.

Alternatives: We think alternatives should be a core component of portfolios, as these allocations can help investors navigate a shifting interest rate, technological, and political backdrop. Hedge fund strategies that offer low correlations to traditional asset classes can help reduce overall portfolio volatility. Private equity offers investors the opportunity to invest in growing companies, including those exposed to AI, that are not listed on public markets.


Cash: We expect cash to progressively deliver lower returns as interest rates fall in 2024. Investors should transition cash and money market holdings into high-quality corporate and government bonds, as well as potential equity beneficiaries of lower rates.


Currencies and commodities: We believe that there are interesting opportunities but that selectivity is important.

  • FX: We are Most Preferred AUD, GBP, EUR, and CHF. We expect the Fed pivot and softer US growth to result in USD weakness over the coming months.
  • Gold: We are Most Preferred. We believe the case for gold as an attractive diversifier remains strong. Central bank buying, geopolitical tensions, and likely lower US interest rates are all supportive for gold prices.
  • Oil: We are Most Preferred. We see tight supply/demand balances offering support to prices.

Base case forecasts for December 2024:

  • S&P 500 Index: 5,900
    • Healthy earnings growth, AI tailwinds, and potentially looser financial conditions provide a constructive backdrop for equity markets in the balance of the year.
  • S&P 500 EPS: USD 250 (+11% year over year)
  • 10-year US Treasury yield: 3.85%
  • Brent oil: USD 87/bbl
  • Gold: USD 2,600/oz
  • EURUSD: 1.12

Main contributor: Alberto Rojas, Investment Strategist, CIO Americas