2024 Q2 Outlook2024Q2Outlook

OVERVIEW

The global economy remains resilient even as major central banks maintain elevated policy rates to tame inflation: 
 

• The near-term growth outlook in the US is still solid, with data continuing to surprise on the upside and labor market strength helping the economy weather the impact of Fed rate hikes. 
   
• Eurozone economic growth stagnated in late 2023, and although labor market strength and rising real incomes are supports for the consumer, higher-for-longer interest rates and weaker demand from China are negatives for manufacturing. 
   
• Solid economic growth in China is supported by target aid from the central bank and government to the ailing real estate sector. Japan is expected to post moderate growth in early 2024, driven by improving consumer sentiment and strong wage growth prospects.

 

Executive Summary

Economic Outlook

• The global economy remains resilient in early 2024 even as major central banks maintain elevated policy rates to bring inflation, a dominant concern throughout 2023, back toward their targets. 
   
• The near-term US growth outlook is still solid, with economic data continuing to surprise on the upside. Labor market strength is helping the economy weather the impact of the Federal Reserve’s (Fed) rate hikes. 
   
• Eurozone economic growth stagnated in late 2023. Although labor market strength and rising real incomes are supports for the consumer, higher-for-longer interest rates and weaker demand from China are negatives for manufacturing. 
   
• Japan is expected to post moderate growth in early 2024, driven by improving consumer sentiment and strong wage growth prospects following recent trade union wage negotiations. 
   
• China’s economy remains solid in early 2024, with the People’s Bank of China and government financing providing targeted aid to the ailing real estate sector. 
   
• On the inflation front, expectations are for a significant decline from last year’s levels after both G7 headline and core inflation pulled back sharply from their 2023 peaks. 
   
• While global core goods inflation eased significantly, services inflation is stickier, driven by solid service sector activity and tight labor markets. These have eased expectations of rate cuts by major central banks. 
   
• Central banks and markets are eyeing the start of policy rates cuts, with the Fed signaling it will take an unhurried approach and remains on hold. 
   
• Meanwhile, the European Central Bank indicated in March that the first rate cut in this cycle could be in the coming months. In contrast, the Bank of Japan ended its ultra-loose monetary policy in March by exiting negative interest rates and Yield Curve Control.

 

Market Outlook

• Following robust gains in 2023, equity markets maintained their rally in Q1 2024 with growth stocks continuing to lead the way, though by a smaller margin than in 2023. 
   
• Globally, US equities continue to lead, spurred by a supportive macro backdrop. Japan is an exception, with the Nikkei 225 Index setting a 35-year-high in late February. 
   
• Consensus expectations for 2024 global earnings are for low double-digit growth in the US, moderate growth in other developed markets, and a double-digit rebound in emerging markets after declines in the past two years. 
   
• Following the aggressive equity rallies, earnings yields are near their lowest levels since before 2004, illustrating how expensive global equities are on a historical basis. 
   
• Despite rising sharply since the beginning of 2022, global bond yields still lag global earnings yields, though that gap has now fallen to its lowest level since before 2004. 
   
• The outlook for bonds remains tenuous. Barring rapid economic deterioration, a sizeable duration rally seems unlikely, and rates could move higher still if inflation remains above the Fed’s 2% target. 
   
• Among large-cap stocks, the breadth of stock performance has started broadening and if this trend continues, the equally weighted S&P 500 could fare better in the rest of 2024. 
   
• Regionally, Japan is relatively more attractive, with still-easy monetary policy, fiscal stimulus to boost both consumer and business spending, along with the fastest earnings growth expectations. The earnings outlook for emerging markets is also attractive and stands to benefit from easing Fed policy. 
   
• Commodity returns are likely to be moderate after a down year in 2023. While commodities are generally supported by supply constraints, there are still downside risks from sharply slower global growth and higher-for-longer interest rates. 
   
• Our outlook for asset outcomes for the balance of 2024 hovers in flat-to-moderately positive territory.