Webinar
2024 Investment Outlook
Capitalizing on today’s market opportunities to meet your financial goals.
Market News
Q2 2024 Investment Outlook
April 1, 2024
At a glance
This year’s opening quarter mimicked 2023’s final quarter in many respects; most traditionally riskier asset classes moved higher due to a resilient consumer, central banks signaling their intent for lower interest rates, and the lack of negative news within focal areas like geopolitical risk, commercial real estate, or lending markets. While the sharp rally that began in October featured longer-maturity interest rates falling (interest rates fall when bond prices rise), strong stock performance to kick off the year has come with interest rates rising; the 10-year U.S. Treasury yielded less than 4% to start the year and moved to 4.2% as we begin the second quarter.
We retain a glass half-full perspective for diversified portfolios and see potential further gains in asset classes and sectors that have not performed as well as stalwarts like domestic Information Technology and Consumer Discretionary stocks. Corporate earnings growth, ongoing capital expenditures emphasizing artificial intelligence and big data management, and ongoing tailwinds from fiscal policy appear to offset the lagged impacts that higher interest rates may have on consumer spending. Should central banks adopt a glidepath approach to lowering their target interest rates while growth impulses remain robust, that could offer both stock and bond investors a favorable investment backdrop and potentially help Real Estate, which so far has lagged in 2024.
In addition to domestic elections, more than half of the global population will face elections or potentially new leaders. Global trade policy will be a key focus for us as we narrow in on U.S. elections, and geopolitical interactions amid ongoing Middle East and Russia/Ukraine tensions could become more market impactful. As mentioned earlier, commercial real estate and the general lending environment are consequential factors in our more bullish outlook, and while we are encouraged by capital market performance, we will not be complacent should risks emerge.
Thank you for the opportunity to share our views across the capital market landscape through our team-based approach.
― Eric Freedman, Chief Investment Officer, U.S. Bank
Global economy
Quick take: The U.S. economy remains exceptional, starting 2024 with solid growth, a strong labor market and moderating inflation. Growth remains disappointing for other major economies, such as the Eurozone, the United Kingdom, China and Japan. Global growth likely remains modest in 2024, with key questions around U.S. government spending, potential stimulus measures from China to rekindle consumer activity, relatively tight global energy supplies and ongoing armed conflicts.
- U.S. economic growth surprised many in 2023, accelerating on strong consumer and government spending. Bloomberg consensus expectations point to better-than-expected growth in 2024, though the pace should moderate into year-end. A strong labor market is likely offset by high borrowing costs, limiting consumer spending growth. Our U.S. Bank Economics Team believes the U.S. economy is likely to achieve a soft landing. The Federal Reserve’s (Fed) battle against inflation remains an important economic story. The Consumer Price Index continues its slowing trend, but ongoing supply constraints mean inflation is unlikely to reach the Fed’s 2% target in 2024. In the U.S., 2024 marks a Presidential election year, though it is unlikely to be an investor focus until the middle of the year as key issues and platforms take shape. Consumer and business uncertainty typify election years as they await clarity on the leadership and policy path ahead. Our analysis indicates market returns historically depend more upon the path of the economy rather than election outcomes.
- Developed markets’ economic recovery hinges on easing interest rate pressures. As the European Central Bank and Bank of England likely shift to lowering interest rates, Europe and the United Kingdom are likely to recover from recent at or near zero economic growth as we move progress through 2024. Central bank policies remain a key factor along with modest inflation pressures.
- Emerging market economic growth remains diverse as China struggles to reignite activity while India continues to rise. Slow global trade, accumulated inventories, modest consumer spending and an overhanging housing slowdown capped China’s growth. China’s growth appears likely to remain slow through 2024, with much depending on specific measures or reforms to spark a rebound. Growth has been better for other major emerging market economies. Technology infrastructure demand remains a support for Taiwan and South Korea while India benefits from demographics and reforms. Brazil and Mexico see slower growth but stable global oil demand, easing interest rates and solid U.S. growth are supportive.
U.S. equity market
Quick take: Enthusiasm around artificial intelligence companies continues to push broad U.S. equity indices higher in 2024. Decelerating inflation, moderating interest rates and stable earnings growth are directionally consistent with higher equity prices.
- U.S. equities begin the second quarter with expanding performance breadth, one indicator suggesting that stocks are poised to trend higher. The S&P 500 concluded the first quarter up 10.2% while displaying improved performance breadth, with nine of 11 S&P 500 sectors delivering gains.
- Full-year 2024 earnings projections are consistent with a not-too-hot, not-too-cold economic environment. Analysts forecast approximately $242 S&P 500 earnings per share, according to Bloomberg, FactSet and S&P Cap IQ, reflecting 10% year-over-year growth.
- Waning inflation, moderating interest rates and stable earnings projections provide valuation support. Resilient consumer spending on experiences relative to physical goods remains an ongoing trend as consumers continue to spend on travel and entertainment. Lower interest rates in 2024’s second half could spur an uptick in durable goods spending, necessary to sustain widespread economic growth. Additionally, while overall credit and associated delinquencies remain at manageable levels, companies noted that lower-income groups are experiencing some financial stress.
- Consumer and business spending trends are supportive of higher prices. Dividend-paying companies have historically underperformed during rising interest rate periods but are positioned favorably when the Fed adopts a more dovish interest rate stance. Demand for artificial intelligence products and services, including processing, cloud computing, security and advertising, continue to bolster technology spending. As with all modern era technological advancements, the total market size of artificial intelligence is a discovery process as applications evolve.
- We favor exposure to both growth-oriented technology and defensive, income-oriented sectors as a strategy to navigate an equity market that appears “priced-to-perfection.” Fast is getting faster, and speed, scale and efficiencies do not occur without technology. While Information Technology and Communication Services stocks that have seen strong year-to-date performance may experience near-term pullbacks, their longer-term growth theses remain intact, warranting continued exposure even at current elevated valuation levels. Conversely, defensive/income-oriented sectors such as Utilities, Real Estate, Consumer Staples and select Healthcare companies should respond favorably to a less restrictive Fed policy stance. This balanced approach provides exposure to evolving technologies while capitalizing on the favorable risk profiles of sectors and companies that lagged during last year’s rising interest rate environment.
International equity markets
Quick take: Stabilizing economic growth and earnings estimates represent key catalysts for further foreign developed price appreciation, with investors looking through a modest 2024 profits contraction toward better conditions in 2025. Global technology demand, India’s ongoing economic development and China’s stimulus policies represent three keys to achieving optimistic emerging market growth targets.
- Positive equity performance and renewed investor sentiment belie sluggish economic conditions and subdued profit growth expectations across foreign developed markets. Strong price momentum and improved geographic breadth propelled foreign developed equity markets to new highs to begin the year. However, Japan’s economy grew at a modest 0.4% annualized rate in the fourth quarter, the United Kingdom entered a technical recession (two consecutive quarters of negative economic growth) and the European economy is stagnant amid higher interest rates and tighter lending conditions.
- An improved fundamental outlook is key to support positive investor sentiment and drive further price appreciation throughout 2024. Analysts anticipate full-year earnings growth will sharply slow from 10.1% in 2023 to -1.7% in 2024. Rising stock prices and falling forward earnings estimates have increased foreign equity valuation (the price investors are willing to pay for estimated earnings) to slightly above long-term averages. Economists anticipate Europe will ease monetary policy throughout 2024’s second half, leading to improved consumer and business conditions; improved growth prospects could provide additional valuation support to propel foreign equity prices higher throughout 2024.
- China policy support and broadening growth drivers represent critical building blocks driving emerging market equity prospects. Analysts forecast a strong emerging markets profits recovery, with earnings rising 19% in 2024 and 15% in 2025. Artificial intelligence and cloud-related applications continue to drive global semiconductor demand, underpinning Taiwanese and Korean technology-oriented equity market prospects. Domestic credit growth and infrastructure spending are key determinants for India’s forward outlook, while China’s policymakers have enacted several measures to stabilize the real estate market, stimulate consumer spending and support the local stock market. Valuation remains above long-term averages, suggesting little price support if growth drivers prove insufficient, and we view emerging markets risk and reward opportunities as evenly balanced through 2024.
Bond markets
Quick take: Investment-grade bonds offer meaningful income despite slightly rich corporate and municipal bond valuations. Modest exposures to insurance-linked securities (reinsurance) for certain qualified clients and non-government agency mortgage bonds can complement traditional fixed income allocations.
- The Fed maintained restrictive policy settings while awaiting further evidence of slower inflation before announcing rate cuts. Treasury yields align with policy makers’ projections for three rate cuts in 2024 as inflation slows. Yields could adjust higher (and prices lower) if inflation’s first quarter uptick persists, but high-quality bonds offer steady income that helps compensate for inflation risk.
- Elevated U.S. Treasury bond supply remains a potential swing factor for yields. High issuance of U.S. Treasury debt to fund the U.S. government deficit spending paired with the Fed’s ongoing effort to reduce its Treasury bond holdings may put upward on Treasury yields to incentivize enough private investor demand to meet heightened supply.
- High valuations limit upside in corporate and municipal bond prices relative to Treasuries, but the extra income is compelling. Corporate and municipal bond valuations rose to reflect that issuers remain in generally strong financial positions with resilient economic activity supporting earnings and tax revenue growth. Corporate and municipal bond valuations can stay high for long stretches of time while delivering attractive current income. Pockets of weaker issuers are struggling with higher debt costs. Highly taxed investors can benefit from the incremental yield on slightly longer-term and lower-quality municipal bonds over time.
- Unique corners of the bond market such as mortgage bonds not backed by the government and reinsurance offer attractive income with strong fundamental tailwinds. Mortgage bond fundamentals remain favorable, with rising home prices in recent years leading to strong collateral support, historically low delinquencies and powerful incentives for homeowners to stay current on their inexpensive fixed rate loans. For qualifying clients, reinsurance, also referred to as insurance-linked securities, offers compelling income opportunities from higher insurance premiums and higher deductibles. Reinsurance may provide constructive diversification qualities relative to stocks and bonds based on its sensitivity to global catastrophes rather than the business cycle.
Real assets
Quick take: Inflation and interest rates present two-sided risks across real assets. Rising interest rates took a toll on dividend-paying assets in the first quarter, even though fundamentals remained strong. Conversely, outsized gains could occur if inflation continues toward the Federal Reserves’ 2% target and interest rates ease.
- Many publicly traded real estate investment trusts (REITs) trade at discounts to the value of the properties within their portfolios, providing a cushion to prices if fundamentals deteriorate more than expectations. While certain property types such as office and retail have post-COVID challenges, most property types, including cell towers, data centers and industrial warehouses, continue to experience strong demand even as income growth is slowing.
- Cash flow and dividends could make infrastructure attractive later in 2024. While the income growth rates of Utilities and midstream energy stocks are decelerating, they’re still well above long-term averages. Additionally, they should continue producing strong and stable dividends for income-oriented investors.
- Decelerating economic growth and inflation are near-term headwinds for commodities. Large production cuts and aggressive rhetoric from the Organization of the Petroleum Exporting Countries (OPEC) led crude oil prices toward the upper end of their five-month price range, but they remain well below 2023 peak prices. The same is true of industrial and precious metals, with gold making new all-time highs, and hopes for a Chinese rebound have been fueling gains in the copper market. However, the potential for a slowing global economic growth global could pressure commodity prices lower in the near term.
Alternative investments
Quick take: Investors view hedge fund allocations positively in the current economic backdrop of ample volatility within interest rates, asset prices and geopolitics. We see opportunities across the hedge fund investing spectrum, including defensively positioned managers for protecting capital in down markets and those seeking to exploit turbulent markets to capitalize on the upside.
- Hedged equity and trend-following strategies have performed well this year, while an event-driven strategy called merger arbitrage was challenged by some company acquisition deals failing to close. We anticipate the market for event-driven strategies will improve, including more initial public offerings, providing hedge fund managers skilled at trading around so-called “hard” catalysts, such as earnings releases, management changes and new product launches, ample opportunities to generate profits.
- The current interest rate environment supports an increasing number of idiosyncratic opportunities to surface in credit markets. Shifting market dynamics change the cost of capital for leveraged companies as well as asset-backed investments and their underlying collateral pools of corporate loans and mortgages. We see attractive opportunities among these securities due to the substantial credit analysis required and potential information advantage by astute investors.
- Persistent uncertainty regarding inflation, interest rates and economic growth continues to create opportunities for active traders. Opportunistic hedge fund managers are generally more active traders and focus on more liquid publicly traded securities compared to private markets. Investors have placed greater emphasis over the past two years on hedge funds’ risk reduction role; however, we have observed investors trimming outsized hedge fund exposures after recent gains and reallocating into private markets.
Private markets
Quick take: The current economic environment has shifted in favor of venture capital investors and away from startup companies. Slow merger and acquisition (M&A), or deal activity, in 2023 is expected to revert to normal levels in the coming quarters, providing private market investors opportunities to deploy capital.
- The demand for venture capital dollars remains much higher than available funding. For every $2 sought by a late-stage startup company, only $1 of investor funding is available, a near decade-high ratio. This marks the sixth consecutive quarter in which demand has outpaced supply, leading to intensifying competition for a limited capital supply.
- Investors have pulled back on riskier bets from 2021’s peak. The increase in interest rates has reduced the need for asset allocators to invest in higher-risk assets such as venture capital to meet return targets, creating a headwind for venture capital fundraising.
- Private equity deal activity is showing signs of pickup. M&A activity continued to slow in 2023 as private equity investment managers and corporate buyers awaited the conclusion of the Federal Reserve’s interest rate hiking cycle. As deal activity slowed, so did the distributions for private equity investors, often referred to as limited partners (LPs). Several factors support a pickup in deal activity in 2024, including slowing inflation trends, potential interest rate cuts, ample private equity manager and corporate balance sheet cash, and pent-up need for investment managers to sell companies held within fund portfolios.
- Our thematic research supports investment in defense and government services sectors within private equity and in digital infrastructure assets within the private real assets category. While we remain cautious about traditional real estate sectors such as residential, office and retail properties, private lending to fundamentally sound real estate is attractive as traditional lenders such as community and smaller regional banks digest their existing commercial real estate exposures.
This commentary was prepared December 2023 and represents the opinion of U.S. Bank. The views are subject to change at any time based on market or other conditions and are not intended to be a forecast of future events or guarantee of future results and is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. Any organizations mentioned in this commentary are not affiliated or associated with U.S. Bank in any way.
U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.
Diversification and asset allocation do not guarantee returns or protect against losses. Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio.
Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for investment. The S&P 500 Index is an unmanaged, capitalization-weighted index of 500 widely traded stocks that are considered to represent the performance of the stock market in general. The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is one of the most frequently used statistics for identifying periods of inflation or deflation.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible difference in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investment in debt securities typically decrease in value when interest rates rise. The risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer’s ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults). Hedge funds are speculative and involve a high degree of risk. An investment in a hedge fund involves a substantially more complicated set of risk factors than traditional investments in stocks or bonds, including the risks of using derivatives, leverage and short sales, which can magnify potential losses or gains. Restrictions exist on the ability to redeem or transfer interests in a fund. Private capital investment funds are speculative and involve a higher degree of risk. These investments usually involve a substantially more complicated set of investment strategies than traditional investments in stocks or bonds, including the risks of using derivatives, leverage, and short sales, which can magnify potential losses or gains. Always refer to a Fund’s most current offering documents for a more thorough discussion of risks and other specific characteristics associated with investing in private capital and impact investment funds. Reinsurance allocations made to insurance-linked securities (ILS) are financial instruments whose performance is determined by insurance loss events primarily driven by weather-related and other natural catastrophes (such as hurricanes and earthquakes). These events are typically low-frequency but high-severity occurrences. Private equity investments provide investors and funds the potential to invest directly into private companies or participate in buyouts of public companies that result in a delisting of the public equity. Investors considering an investment in private equity must be fully aware that these investments are illiquid by nature, typically represent a long-term binding commitment and are not readily marketable. The valuation procedures for these holdings are often subjective in nature. Private debt investments may be either direct or indirect and are subject to significant risks, including the possibility of default, limited liquidity and the infrequent availability of independent credit ratings for private companies.
Insights from our experts
Developing your investment strategy
Knowing your investment goals and risk tolerance helps us diversify your portfolio with a mix of equities, bonds and real assets.
Understanding tax law changes
January 6, 2023
Learn what new tax law changes included in the Inflation Reduction Act and SECURE Act 2.0 may mean for you.
How we analyze the economy
The economy doesn’t just move in a straight line. Our Health Check assesses its direction and how fast it’s moving.
Start of disclosure content
Disclosures
Start of disclosure content
Start of disclosure content
Equal Housing Lender. Deposit products offered by U.S. Bank National Association. Member FDIC. Credit products are offered by U.S. Bank National Association and subject to normal credit approval.