It's time to start deploying those stockpiles of cash

In the 2024 outlook published in November, I made several predictions about the state of the global economy. These included rate hikes shifting to cuts in the United States, where the Federal Reserve would successfully engineer a “soft landing”; the Eurozone and United Kingdom teetering on the brink of recession before seeing growth improve; and Japan exiting yield curve control and negative interest rates.

As for the geopolitical environment, I anticipated that the Ukraine war would drag on while Western tensions with China remains elevated, and that the US election would become a focal point for investors given its potential effects on the geopolitical trajectory.

Through the second half of the year, I expect:

• US growth and inflation to decelerate, allowing the Fed to cut rates in the second half of 2024;
• A razor’s-edge US election with significant economic and market implications;
• China’s housing challenges to persist, but with the cumulative effects of stimulus lifting growth;
• Eurozone disinflation to allow the European Central Bank (ECB) to ease policy materially in 2024, adding additional momentum to already-accelerating growth;
• Japan’s inflation normalisation to persist, leading households to reassess asset allocation; and
• Western resolve to defend industry against Chinese competition to stiffen, adding to elevated tensions over China’s support for Russian aggression in Ukraine.

The global outlook has brightened in 2024 despite some disappointing news along the way. Real GDP growth expectations for the United States have doubled to 2.4% for 2024, but at the cost of somewhat stickier inflation than previously expected. 

China has taken additional, albeit still insufficient, steps to attack the residential real estate crisis that has sapped consumer confidence. The Eurozone economy appears to have turned the corner with improving service sector prospects and manufacturing stabilisation. Japan surprised on the upside, with higher-than-expected wage increases potentially signalling the beginning of a virtuous domestic wage-price feedback loop.

This positive economic trajectory has been sustained despite ongoing humanitarian crises in Ukraine and the Middle East and simmering tensions between the West and China.

Interest rate markets have endured significant volatility since the fourth quarter of 2023 with expectations for central bank policy easing ranging from as little as 25 basis points (bps) of Fed rate cuts by year-end to as much as 200 bps of ECB rate cuts.

Non-US equity markets have delivered broad-based gains, while the US advance has been narrowly led by a short list of artificial intelligence (AI) and tech beneficiaries. In fact, while the S&P 500 Index has rallied 15% as of late June, the median stock is up just under 4%, and a single stock, Nvidia, accounts for just over 30% of the year-to-date S&P 500 Index rise.

Looking to 2025

I think we have seen peak hawkishness in the short-term rates market. Expectations for rate cuts are likely to increase, with investors settling on a terminal rate in the easing cycle at ~2%–2.5% in the Eurozone and ~3.5%–4.0% in the United States. These expectations translate to little or no downside for US 10-year Treasury yields, which means that US equity market valuations likely have limited upside from current historically elevated levels. Outside of the United States, there is still room for upside both in terms of valuation multiples and earnings recovery given less-resilient economic conditions since the pandemic.

In my view, the tech-AI juggernaut can only be sustained if the customers buying these goods and services realise a return on investment. Put simply, CEOs and CFOs of large companies will not just continue to pour money into AI investments if there is no evidence that the capital deployment is paying off.

I believe 2024 is too early to see these returns in earnings or profit margins, but 2025 is not. As investors look ahead, I expect to see a broadening of the equity market rally driven by better earnings growth outside of the technology sector. Importantly, this broadening does not mean that tech and AI stocks stop working. If their customers realise strong returns on investment from their purchases of tech and AI goods and services, I believe we could see continued solid performance from some of the tech leaders. However, the gap between the tech leaders and the rest of the market would likely narrow, if not reverse, as investors realise that the rest of the market has largely stagnated for over two years and now offers more attractive return potential.

United States

Key view: The US economic outlook is positive, but the capitalisation-weighted S&P 500 Index appears fully valued. Upside from current levels will need to be driven by earnings growth and a broadening of the equity market rally beyond a small number of technology-related companies.

China

Key view: There is no quick fix for China’s housing woes, but the broader economy is likely to improve through year-end as real estate investment bottoms. Chinese equities have rallied strongly year-to-date and could offer more upside, but the easiest gains are likely behind investors.

Eurozone

Key view: Eurozone growth is likely to accelerate from the sequential stagnation of 2023 as inflation subsides, the ECB eases monetary policy, and real wages increase.

Japan

Key view: Japan appears to be in the early stages of an inflation normalisation process that should lead to changes in consumer purchasing behaviour and household asset allocation decisions. Companies are managing their balance sheets more effectively, which should lead to higher returns and increased growth as capital is put to more productive uses.

Geopolitics

Key view: Geopolitical risk is unlikely to subside. The war in Ukraine looks nowhere near resolution and there is a growing US bipartisan consensus on increasing economic and geopolitical pressure on China. Meanwhile, a Trump presidency may inject even more volatility into the geopolitical landscape given uncertainty over his support for European and Asian allies and his plan to broadly raise US tariffs.

What are the market implications?

To read my in-depth views on each of the above categories, followed by a comprehensive conclusion outlining the market implications, you can read the full report here or in the attached PDF.