22 Apr 2024 3 min read

AA Outlook Q2 2024: Something's gotta give

By Emiel van den Heiligenberg , Tim Drayson

Consensus is clustered around a trilogy of lower inflation, rate cuts and continued growth. Is the market beginning to question this benign path?


The following is an extract from our Q2 Asset Allocation outlook.

The first quarter saw a strong rally in risk assets amid increasingly widespread optimism. Yet April hints the path to a soft landing has narrowed, and, at this altitude, investors risk being more exposed to a shift in the wind or a decline in visibility. This creates a potentially unforgiving environment for risk assets.

Since our last quarterly update US GDP expectations have gathered pace, with virtually all forecasters now giving up on recession. Despite the positive growth momentum, a gradual cooling is still widely expected, so consensus is now heavily clustered around a narrow soft-landing window. Inflation has surprised to the upside in the first three months of 2024, driven by sticky services prices.

This combination has led markets to pare rate cut expectations this year from six to no more than two. Yet this delay in rate cut expectations has not proved too problematic for equity markets, which despite some increase in volatility in April, partly due to heightened geopolitical risks, have taken the view that this is merely a bump in the road to rate cuts amid a higher neutral rate.


Another rabbit in the hat

The continued resilience of the US economy surprised many, ourselves included. As we’ve highlighted previously, fiscal policy has been highly supportive for growth, with Federal spending and deficits exceeding expectations, alongside robust state and local government spending. Excess household savings and the onshoring boom also played a part.

Developments in labour markets have recently emerged as another potential explanation, with recent Congressional Budget Office data showing US immigration has been much stronger than previously estimated. This is likely to be a hot-button topic ahead of the election, but from an economic viewpoint, it’s had the unintended consequence of allowing the labour market to rebalance alongside still strong employment growth. Job vacancies are being filled, but unemployment remains relatively stable.

Assessing the potential of AI

The strong performance of equity markets in the quarter has also been supported by continued optimism around artificial intelligence (AI).

Our team continues to assess the possible macro impacts of AI as we move rapidly from proof of concept to real-world solutions. There’s no doubt that a sudden spike in productivity would be disruptive, potentially eroding the negotiating power of labour, causing deflation, or even displacing whole groups in society whose skills cease to be valued.

And yet…

Despite the consensus optimism, we remain short risk assets.

We believe the combination of what’s priced in equity markets, credit valuations, rate cuts, top-down earnings, ‘Goldilocks’ growth and inflation expectations will prove difficult to achieve, and a deviation from this narrow path is most likely to negatively impact equities. Strong nominal US GDP growth and a rise in productivity growth have helped companies meet or beat earnings expectations, lifting markets. But if inflation is to fall back to target, this could put pressure on margins – a typical late-cycle development.

This also means the economy and markets are vulnerable to shocks, for instance the human tragedy and flare up of geopolitical risk we unfortunately see unfolding in the Middle East at the moment.

Outside the US, changes to growth and inflation outlooks have been more subtle as growth has continued to stagnate, though expectations remain for some recovery through the year. China remains a notable laggard, with the property overhang dragging on activity and prices, though some policy support is allowing the broader economy to muddle through for now. 

The above is an extract from our Q2 Asset Allocation outlook.



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Emiel van den Heiligenberg

Head of Asset Allocation

Emiel is responsible for the overall strategic direction of the team’s investment and business strategy. He claims to have been a promising lightweight rower at university until French fries got the better of him. Reflecting his love for rowing in a team, he firmly believes that excellence can only be achieved by a great team made up of motivated individuals that are also eager to work together. To this end he is the self-proclaimed inventor of the verb 'teaming' to acknowledge that shaping a top team and culture of excellence is an ongoing process. Outside of work-family obligations, Emiel’s spare time is filled by a passion for shark diving and skiing. Prior to dedicating his career to portfolio management in 1996, Emiel worked as a policy adviser in the Dutch Ministry of Finance and he graduated from Tilburg University in the Netherlands ages ago. When not glued to his Bloomberg screens, this Dutch man is hooked on computer games, peanut butter and his favourite dark beer made by Belgian monks.

Emiel van den Heiligenberg

Tim Drayson

Head of Economics

Tim keeps a close watch on global economic developments, with a particular focus on the US. He believes nothing good ever happens after midnight, which is why he is rarely spotted out late. Tim joined in 2008 from the number-one ranked economics team at ABN AMRO, with prior experience from HM Treasury, and graduated with a MSc from the University of Nottingham. When not crunching economic data, he can be found studying the weather forecast, analysing his cycling statistics or looking anxious on three-foot putts.

Tim Drayson