“If growth were to remain firm, inflation could quite conceivably rear its ugly head again down the road. When push comes to shove, the authorities may well tolerate inflation remaining closer to 3 per cent, if a return to 2 per cent required a recession.”
Thompson believes that the more positive economic outlook is currently “priced in”. He says: “Global equity valuations are back a bit above their long-term average, while bonds are now pricing in rates falling considerably faster than the central banks are suggesting. There is still reason for some caution.
“As we have noted before, the momentous forecasting misses by almost all and sundry in recent years mean one should keep a fairly open mind about what lies ahead. The structural changes under way in the global economy mean economic forecasting is even more difficult than ever.”
Venetis says he is encouraged by how the equity market rally has evolved in response to the data. “What is encouraging is that the breadth of US equity gains has improved during this rally: small-caps have outperformed and large-cap, equal-weighted indices have outpaced their market cap-weighted counterparts, which are dominated by the [large technology stocks],” he says.
“In addition, while the upturn in global profits [MSCI World index] since spring 2023 remains predominantly a US story, it looks as if the rest of the world is starting to play catch-up. After staying flat through the [second half of] 2023, non-US forward earnings expectations have picked up in the last couple of months – notably in the euro area and [emerging markets] ex China – adding to sustained strength in the US and Japan.”
Where’s the opportunity?
Abrdn senior investment manager Jason Day is another who believes the next leg of growth in the US market could be away from the large caps.
He regards large caps as being there for defensive reasons, in case of a downturn, while regarding small and mid-cap companies as being attractive both in terms of being able to capture any uptick in economic growth, but also on valuation grounds, as he notes that the smaller companies currently trade at a wider discount relative to the larger firms than has been the case for the past 30 years.
Quilter Investors portfolio manager Stuart Clark says that rather than being in a “Goldilocks scenario” of inflation falling without a recession occurring, there is an element of pain being postponed, while good economic news may prove to be bad news for investors.
In terms of what this may mean for investors, Clark says that following a very strong performance for most assets at the end of 2023, markets have been “nervy” in 2024.
