2024 Global Market Outlook – Q2 Update: Pent-Up Exuberance
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We believe optimism over a soft-landing scenario - where economic growth slows but a recession is avoided - may deliver more near-term market gains, as inflation declines and central banks look to start easing around mid-year. However, we think the risks of a sharper economic slowdown later in 2024 are elevated, as the lagged impact of previous interest rate rises has yet to be fully felt.
Key market themes
Raphael Bostic, president of the U.S. Federal Reserve Bank of Atlanta, coined the phrase pent-up exuberance in a recent speech. While Bostic was referring to the risk of renewed economic acceleration, we believe the term also captures the mood of markets, as exuberance about the surprising robustness of the economy spills over into investor enthusiasm. Coupled with declining inflation and solid corporate profits—particularly for AI (artificial intelligence)-themed mega-cap stocks—investors who were fearful of a recession in 2023 are being drawn into the market, with the positive momentum having the potential to push the S&P 500® Index to further record highs.
While a soft landing is possible, we think the risks of economic growth eventually disappointing markets are underappreciated. President Bostic's warning of pent-up exuberance is one that we believe investors should carefully consider, as this year's optimism could eventually prove to be excessive.
We still think some of the impacts of the Federal Reserve's (Fed) aggressive rate-tightening campaign are continuing to work their way through the U.S. economy—just at a slower pace than usual. Our concern is that the Fed's caution about inflation being sticky will further delay rate cuts. In our opinion, this increases the likelihood that the soft landing currently priced by markets overshoots into a mild recession. We expect the Fed to start easing in the middle of the year but will become more concerned about the longer-term outlook if rate cuts are delayed to the end of the year.
We believe it's more likely than not that the U.S. avoids a recession in 2024, but economic uncertainty remains high with the economy running at full capacity, household savings diminishing, the labor market slowing down, and the U.S. Treasury yield curve still inverted.
In Europe, economic activity indicators are surprising to the upside, while core inflation is tracking toward the European Central Bank's (ECB) 2% target. The ECB has hinted that rate cuts are likely to commence in June in response to the downward trend in core inflation.
The outlook for the UK continues to be challenging. GDP (gross domestic product) growth is stagnant, and inflation is declining at a slower pace than in other developed economies. Market expectations are for the Bank of England to begin lowering interest rates in the third quarter, which would provide some relief.
China has announced a 2024 GDP growth target of around 5%. Unlike last year, its economy will not benefit from a post-pandemic reopening, which leads us to believe that this target will be difficult to achieve.
Japan is beating expectations in economic activity and corporate profits growth, as well as in financial markets, where the Tokyo Stock Price Index (TOPIX) has reflected the best-performing market year-to-date. We anticipate trend-like growth from Japan through the rest of the year.
We expect the Australian economy to continue with below-trend growth, but think a recession will be avoided. The Reserve Bank of Australia will likely lag other central banks in cutting rates, and we expect the first rate cut at the end of the third quarter.
In Canada, we believe a recession is more likely than not over the next 12 to 18 months, with the Bank of Canada likely to start cutting rates by mid-year.
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Disclosure: These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions ...
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