A just-published report updated our investment strategy, and noted that an important inconsistency was building: investors are betting that profit growth will strengthen and at the same time they expect a sizable decline in DM policy rates. Such a combination is unlikely, or at least unlikely to be sustained for very long. One or the other outcome will occur in 2024, but not both.
We remain of the view that earnings will perform well in 2024, as the global economic outlook is moderately upbeat. In fact, the latter has improved since October as a consequence of much lower DM policy rate expectations and bond yields, as well as the sizable rebound in global risk asset markets.
That leaves aggressive rate cuts as the candidate to disappoint investors. The economic/inflation conditions needed to sustain a rate-cutting cycle is not expected to develop in 2024. Moreover, the prospect for another upleg in DM bond yields is brewing, stay tuned.