Technology

Recessions often begin seemingly out of the blue when the economy’s temperature falls enough to set in motion adverse feedback loops that cause unemployment to rise. We expect the US economy to suddenly freeze over towards the end of this year or in early 2025. For now, a benchmark allocation to equities is appropriate, but a more defensive stance will be necessary later this year.

We created a sector selection scorecard based on performance of sectors under various macroeconomic regimes while taking into consideration revisions to expected earnings growth and valuations in a historical context. Our total sector selection scorecard suggests overweighting defensives such as Utilities, and Consumer Staples, and underweighting cyclicals such as Consumer Discretionary, Industrials, and Financials. Considering this analysis, we have adjusted our sector positioning accordingly.

The soft landing and rate cuts narrative is being priced out, and the S&P 500 is overvalued and getting overbought. The Magnificent Seven are about to get a new moniker on the back of performance dispersion. However, without the cohort, S&P 500 earnings would have been even deeper in the red.

A recent slew of macroeconomic data has reassured us that the runway to a recession is longer than many thought. However, that positive realization comes with two caveats. First, the Fed pivot is not imminent, and the magnitude of rate cuts may disappoint. Second, the recession has been delayed but not avoided. Further, geopolitical risk is elevated. We will overweight Tech on the next dip and upgrade Retail to an overweight.

Disinflation coupled with sticky wage growth is likely to result in either a second wave of inflation or layoffs and a recession. In the meantime, market expectations for sales, growth, and margins are overly optimistic and are inconsistent with macroeconomic headwinds. We recommend gradually realigning the portfolio to a more defensive stance.

Our 2024 outlook can be encapsulated into just 39 words and three key views. Key view 1: The end of China’s housing boom means the end of the world’s main growth engine. Key view 2: If the Fed and ECB don’t kill the economy, they won’t kill inflation. Key view 3: The AI gold rush will struggle to find any gold. We go through the investment implications for the year ahead.

We expect the US economy to slow and potentially downshift into a recession sometime in 2024, as tighter monetary policy weighs on consumers and businesses. In addition, (geo)political tensions may increase market volatility. The risk/return for US equities is unfavorable. We recommend that our clients reduce portfolio beta and increase allocations to defensives and quality growth.

Our political forecasting scored wins in 2023 but we failed to capitalize on it adequately in our trade recommendations.