2024 2nd Quarter U.S. Economic & Investment Market Review

In Q2 2024, the U.S. economy is set for a soft landing despite risks from elections and geopolitical tensions. Strong labor growth and gradual inflation decline are expected. While the Fed remains cautious on rate cuts, investment opportunities in global markets and alternative assets offer promising prospects for investors.

The U.S. should maintain its soft-landing into next year, but risks remain

U.S. economic momentum remained solid in 1Q24, supported by resilient consumer spending. While signs of consumer stress are emerging, moderate consumption growth on the back of rising real wages should extend the U.S. economic expansion into next year. That said, with an upcoming U.S. election, higher policy rates and elevated geopolitical tension, risks remain that could knock the U.S. economy off its steady path.

Strong labor supply gains should keep unemployment low

Strong growth in the U.S. labor supply, driven by increased labor force participation and a surge in immigration, has supported impressive job gains without higher inflation. Moving forward, tighter labor supply, falling job openings and solid productivity growth could slow the pace of job gains. That said, a backlog of migrant workers waiting to be integrated into the U.S. economy should allow employment growth to continue at a solid pace, and the unemployment rate should stay low.

Inflation should continue its slow descent to 2%

Inflation remained stubbornly elevated above 3% during the first half of 2024, feeding concerns that inflation may be sticky above the Fed’s target. While the journey down may take longer than expected, stable supply chains, moderating wage growth and substantial decreases in shelter and auto insurance inflation should allow overall inflation to resume its slow descent and return to 2% by the middle of next year.

Broadening profit growth should support a more inclusive equity market rally

Results from the 1Q24 earnings season looked solid, as margin expansion helped pro-forma earnings grow by over 6% y/y. As has been the case for some time now, earnings growth has remained dominated by the “Magnificent 7.” However, we don’t expect this trend to last. As 2024 progresses, broadening profit leadership across sectors should support a more inclusive equity market rally.

The Federal Reserve is still looking to cut rates, just not yet

Stalling progress on disinflation has caused the Federal Reserve to reassert its hawkish tone. While it remains biased toward easing policy, the Fed needs more evidence that inflation is sustainably moving back toward its 2% target before taking action, and rate cuts have likely been postponed until September at the earliest.

The global economy appears to be turning a corner

After a sluggish ending to 2023, prospects for the global economy are improving. Economic surprises have turned positive in Europe, and while China’s recovery has been shaky, other parts of Asia should benefit from a turn in the electronics cycle and continued AI tailwinds. With U.S consumer activity expected to slow, narrowing growth differentials should highlight plenty of attractive opportunities across global markets.

Investors have an extended opportunity to lock in higher yields

After a tough start to the year, bonds have rebounded and recent performance has stabilized as investors have accepted the more hawkish outlook for policy. Still, the hawkish repricing earlier this year has dramatically improved the yields offered by fixed income. With rates unlikely to move meaningfully lower without an economic shock, investors should use this prolonged period of higher yields to lock in attractive income.

Active management is key for investing in concentrated markets

Resilient economic activity and solid earnings growth pushed markets higher during the second quarter. However, market performance remains concentrated as the largest stocks in the index have continued their dominant run. While valuations look stretched at roughly 21 times earnings, there are still plenty of attractive opportunities beneath the surface, and an active approach can help investors identify those companies with high quality earnings and attractive valuations.

Positive fundamentals should extend the international rally

Strong performance across international markets has pushed valuations higher since the start of 2024. Even still, in both absolute terms and relative to their own histories, international markets continue to look attractively priced compared to the U.S. This, combined with improving earnings expectations and a more favorable economic backdrop, presents an attractive opportunity for U.S. investors to diversify abroad.

Alternatives can meaningfully enhance portfolio outcomes

As elevated valuations, low income and positive stock-bond correlation continue to challenge the 60/40 portfolio, investors should consider alternative assets in the portfolio construction process. There are a wide range of assets in the alternatives landscape, each catering to the different investment objectives of alpha, income and diversification. As such, adding a sleeve of alternatives can meaningfully improve portfolio outcomes and help investors reach their strategic goals.

Investing at all-time highs is not as scary as it seems

The S&P 500 has notched more than 30 all-time highs so far this year. Considering this, many investors may feel like they missed the boat, leaving them on the sidelines waiting for a pullback before deploying capital. However, history shows that, even at all-time highs, markets can still be attractive, as strong performance tends to beget more strong performance.

2024 1st Quarter U.S. Economic & Investment MarketReview