Our macro outlook considers a soft landing where US inflation and growth moderate and the Fed starts 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 ahead of the decline in interest rates.
  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 50bps this year, with the first easing move in the September meeting.

Asset class views:
Our preferred asset class remains fixed income; we keep US equities neutral, but acknowledge that they have a constructive macro backdrop.

Fixed income: We favor quality bonds, given the potential for capital appreciation as inflation recedes and yields drift lower in 2H24. We are therefore most preferred in (IG) corporate bonds, AAA-rated CMBS, and agency MBS.

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

  • US equities: We increased our year-end target to 5,900, from 5,500 previously. We believe the backdrop for US stocks is constructive, given solid earnings growth, AI tailwinds, and the potential for 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 think small-cap valuations are very attractive both relative to their own history and versus large caps.
    • Sectors: Most preferred—information technology and industrials. Least preferred—consumer discretionary and real estate.
  • UK equities: Most preferred. With the improving global manufacturing outlook, we have positive views on oil and industrial metal prices, which should boost profits for the UK's commodity-linked sectors. In addition, the outlook for domestic consumption is likely to improve amid a resilient labor market and normalizing inflation.
  • EM equities: Neutral. From a macroeconomic standpoint, although activity in emerging markets remains resilient, the positive momentum has slowed, especially with China's economic data softening during 2Q24. From here until the year-end, we are penciling in mid-single-digit total returns for the MSCI EM benchmark.
    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 beneficiaries of lower rates in equities.

Currencies and commodities: We think there are interesting opportunities, but selectivity is important.

  • FX: We are most preferred CHF. Euro zone geopolitical concerns support the Swiss franc in the short term, while declining interest rate differentials should underpin the currency over the longer term.
  • 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: 1.09

Main contributor: Alberto Rojas, Investment Communications Writer - CIO Americas

Disclaimer