Crypto and tech led surprisingly strong gains in 2023
Global stocks confounded the skeptics last year and surged 20%, driven by sharp recoveries in crypto assets and tech shares, whilst commodities were the big loser as oil plunged. But it was a tough year in many ways, with returns heavily concentrated in the US and the ‘magnificent 7’ big tech stocks. Many investors remained cautious for too long, whilst Chinese shares plunged and the FTSE 100 flatlined.
Lower inflation to drive interest rate cuts and double-digit earnings growth in 2024
2024 has the ingredients to be a positive year given recent dramatic falls in inflation across much of the world. This will allow central banks to start cutting interest rates from current high levels on both sides of the Atlantic, sooner and to a greater extent than thought possible only a few months ago. These lower rates will support economies and stock market valuations and contribute to rebounding company profits to double digit levels.
We see four ways this unfolding rally may be different now
Consensus expectations for single-digit S&P 500 index returns for this year are likely too low but it will be a very different rally than that of 2023. Returns will likely be lower after last year’s strength, given the already high valuations in the US. Returns may be back ended, as investors wait for central banks to start cutting rates. Stock market leadership may be different, with lagging and cheaper cyclicals more sensitive to coming rate cuts than high-flying tech stocks, whilst unloved European and Emerging Markets may disproportionately benefit versus the US stock market juggernaut of recent years.
The rotation to last years laggards is the biggest call
We believe the sector and investment-style shifts outlined above could be the most important decisions investors make this year. There is a significant rotation underway from the supersized US market and its big tech defensive growth winners of last year toward the cheaper and more out-of-favour assets that are most sensitive to the forecast economic soft landing and interest rate cuts. This includes real estate, financials, and small caps, through to Europe and Emerging Markets.
Cash, the Dollar, and Commodities to be the disappointments
Stocks, crypto, and bonds seem the best positioned asset classes for 2024, with cash and the US dollar likely losing ground and commodities set to remain depressed. Lower inflation and interest rates will reduce the attraction of cash and boost long duration bonds whilst the US dollar may be hurt by lower US rates and investors’ higher risk tolerance, helping others from commodities to the Japanese Yen. Crypto meanwhile is sensitive to a long list of 2024 catalysts, from a spot bitcoin ETF to its halving.