Pros’ top reasons to be fearful and cheerful for rest of 2024

From the outlook for inflation and interest rates to the US election and outlook for artificial intelligence (AI), asset allocators have plenty to contemplate. While some eventualities would provide a tailwind for equities, others would likely serve to hold them back.

We ask a range of professionals – investment consultants, market strategists, fund managers and chief investment officers – to name the biggest reason to be fearful and cheerful about the outlook for stock markets for the rest of 2024.

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Fearful: inflation isn’t under control and central banks cut too early
Cheerful: inflation is under control and central banks can cut

Fairview Investing director Ben Yearsley’s fearful and cheerful are two sides of the same coin: inflation and interest rate cuts.

“We’ve moved from five to six rate cuts that many, me included, pencilled in for 2024 to expectations for two in the UK and one in the US,” he says. “Stubborn inflation and decent growth coupled with wage inflation have made central banks wary. This is the crux of the problem for the rest of the year and into 2025.”

With one cut under the belt of the Bank of England, will there be more this year? “What happens if there is? What happens if there isn’t? That’s definitely the cheerful and the fearful for the short term and, paradoxically, probably the reverse over the long term.”

Rate cuts would be good for small-caps and bonds especially, adds Yearsley. “The good thing about bonds is they work in both cheerful and fearful scenarios. You’re being paid 5% to 6% for investment grade bonds today. Add a rate cut and you’d be in double figures (in terms of overall total returns) over the next year.”

His favourite fund in the space is AXA Global Strategic Bond.

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Fearful: Trump’s ‘America First’ approach
Cheerful: green shoots for developed market smaller companies

The prospect of Donald Trump returning to the White House is unnerving FundCalibre managing director Darius McDermott.

“An isolationist American receding from the global stage opens the door for Russia and China to expand their imperialistic ambitions,” he says. “If the US fails to back up its allies and support the Ukraine’s war efforts, we could be moving into unchartered and dangerous waters. It remains to be seen how much of the rhetoric will translate into policy should Trump return to the White House.”

The prospect of rosy returns from small-caps puts McDermott in a more jovial mood. “We are starting to see the finest of green shoots for developed market smaller companies, including both UK and US smaller caps,” he says. “The relative valuation gap is compelling. US small-caps have underperformed for over a decade, with relative valuations between large caps the widest it has been since the dot-com crash 25 years ago.”

He tips Artemis US Smaller Companies and T. Rowe Price US Smaller Companies Companies Equity as potential beneficiaries. “Furthermore, small-cap stocks tend to outperform in a falling interest rate environment,” he adds.

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Fearful: US exceptionalism is showing signs of fatigue
Cheerful: European consumers are finding their feet

For Hugh Gimber, global market strategist at JP Morgan Asset Management, a cooler US equity market would “likely to be felt across all parts of the globe” given it now commands an all-time high of 65% of equities globally.

He points out: “US equities have done a lot of the heavy lifting for global equity returns, not just in recent quarters but over the past 10 to 15 years, [but] the outlook moving forward appears somewhat more challenging. The US economy may not be cracking, but it is clearly cooling. Enthusiasm around AI stocks is well reflected in valuations and is now being tempered by concerns around the timing of returns linked to huge levels of investment.”

While US exceptionalism is waning, consumers across the Atlantic are finding their feet, he says.

He adds: “Positive real wage growth is fuelling a rebound in confidence, and stronger consumption looks set to drive a recovery in growth across the UK and eurozone over the coming quarters. Every sector in Europe trades at an above-average discount to its US counterpart, suggesting ample opportunities for stock pickers to identify companies that are undervalued simply because of where they are located.”

Fearful: over-optimism surrounding AI
Cheerful: AI theme permeates beyond the Magnificent Seven

AI and its effect on companies and share prices has made Paul Niven, head of asset allocation for EMEA at Columbia Threadneedle and manager of F&C Investment Trust Ord (LSE:FCIT), both fearful and cheerful.

“Over-optimism around the productivity and commercial benefits from AI, alongside the prospect of overcapacity through capex and geopolitical uncertainty, remain key risks to the outlook,” he says. “While valuations relative to earnings remain well below that of previous equity market bubbles, the [US] market remains vulnerable to slowing momentum in this high-growth, but expensive, segment of the market.”

While the Magnificent Seven are among the highest-quality businesses globally, a significant amount of future growth is priced in and the bar remains high for earnings. But while names such as NVIDIA Corp (NASDAQ:NVDA) and Microsoft Corp (NASDAQ:MSFT) are primed to be significant beneficiaries of the first wave of AI adoption, it is the subsequent waves that have Niven excited.

“The AI theme permeates beyond the Magnificent Seven, providing significant opportunities for future growth across chipmakers, power generators and data-centre infrastructure providers,” he says. “One example is our holding Vertiv Holdings Co Class A (NYSE:VRT), which is a specialist in data-centre cooling solutions and has delivered gains of more than 500% since the end of 2022.”

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Fearful: Federal Reserve is behind the curve
Cheerful: investor nervousness on US recession risk is overdone

The decision by the Federal Reserve to hold rates at its July meeting was largely expected, but is it now behind the curve?

Hiroki Hashimoto, a senior fund manager at Royal London Asset Management (RLAM), says: “The latest US employment report showed the unemployment rate unexpectedly rising to 4.3% in July from 4.1%, triggering the ‘Sahm rule’.” This indicator claims the US is in a recession when the three-month average US employment rate rises by 0.5% or more from its 12-month low.

RLAM’s investment clock, which tracks various growth and inflation indicators, has seen a similar development, moving to the bond-friendly “reflation” quadrant. Being overweight bonds and neutral on equities “makes sense for now”, says Hashimoto, but the possibility that US recession risk is overdone could provide stock market cheer.

He says: “It’s possible that investor nervousness on US recession risk is overdone despite bond investors starting to price in emergency intra-meeting rate cuts.

“Although our investor sentiment indicator has not yet triggered a contrarian ‘buy’ signal as we entered the sell-off [seen in early August] from complacent levels, we wouldn’t be surprised if an opportunity to ‘buy the dip’ presents itself soon.”

Cheerful: virtually every asset class has an amazing risk/return profile
Fearful: crowd mentality is rife

Crowdthink is rife in financial markets and has Neil Birrell, chief investment officer at Premier Miton Investors, fearing a broad sell-off.

“We’ve seen it as interest rates and inflation have risen – investors have sought safety in large companies and indices. The same has happened with the Magnificent Seven and the rush to AI-related investments. That’s what worries me.

“If, or when, that rolls over, investors will rush to the door in a tsunami-like way, taking everything with them. Such is the dominance of those companies in indices, markets will sell off and when that happens most things fall.”

On a much more positive note, he reckons virtually every asset class offers “amazing long-term risk/return profiles”.

“You just need to find them,” he says. “And stock markets are the best of the lot for that. Market indices could well be lower at the end of the year if the big US companies carry on falling, but the money that floods out of them must find a home.”

Topping his list of bargains are small companies almost everywhere, the UK, real estate investment trusts, healthcare and renewable energy companies. “The opportunity set is big and compelling, you just need to be in the right place,” he concludes.