The first half of 2024 has seen the market successfully navigate the ongoing complex macroeconomic environment. As a result, the narrative surrounding a potential soft landing has persisted, although it is still not a foregone conclusion.
We observed towards the end of 2023 that the imminent rate cuts being priced in by the market may not happen, something which now has been proven correct. Whilst rates have been cut in the Eurozone, the Federal Reserve (“Fed”) and the Bank of England (“BoE”) are yet to do so. There is a possibility that the Fed maintains its current 5.25-5.50% range for the rest of the year, whilst it seeks more proof that inflation is moving sustainably towards its 2% annual target. The upcoming U.S. elections create more uncertainty around the path for inflation, but also around the leadership position at the Fed. Consequently, the range of outcomes for interest rates in the U.S. remains extremely broad.
In Europe and the UK, inflation has moved closer to central banks’ long term targets, and we would expect gradual rate cuts over the remainder of 2024, although this is likely to be more an “easing off the brakes” as opposed to “stepping on the accelerator.” Guidance from all three central banks has remained hawkish as inflation has remained sticky, suggesting the more dovish rate cutting programmes the market was expecting at the start of the year are unlikely to materialise, and instead we will remain in a period of “higher-for-longer” rates.
The macro-environment has remained robust, growth expectations in the U.S. have remained strong, and we are continuing to see more green shoots pointing towards a recovery in Europe. Equities continue to scale to new heights, although this has been uneven due to the disproportionate impact of technology. When we look at the equal weight S&P 500 the picture is less rosy as most of the U.S. earnings growth expectations are driven by a handful of tech companies benefitting from the AI boom, which has continued to push the index higher. Risks remain in the second half of the year, notably geopolitical, with elections having taken place in the UK and France already, and the United States preparing for the presidential election in November. There is also no visibility of any de-escalation of the conflicts in Ukraine or the Middle East. These elections and changes of government could have significant implications for fiscal spending, trade policy and international relations. Even so, the market is in a strong position and we are seeing signs of an uptick in activity in public and private credit markets.