Three risks we are thinking about for 2024

While the inflation genie is not completely back in the bottle, the trend has been positive. The prevailing dour sentiment at the end of 2022 saw many Wall Street strategists have negative return expectations for the S&P 500 and, believe it or not, sentiment towards technology stocks was extremely low, though that was before many of us had heard about Chat GPT.

Reality was quite different. AI contributed towards a boon year for technology stocks, the much-feared recession failed to eventuate, and investor sentiment improved as a result, causing earnings multiples to expand. Proof again that the greatest risks and opportunities in markets arise from consensus views, which ultimately prove incorrect and spur repricing; 2023 was proof of that.

Today, the consensus paints a less bearish view. Scanning external research and fund manager surveys tells us that:

• Year-end price targets for US equity indices are pointing to high single-digit returns for equities.
• Investors are generally overweight “big tech” stocks.
• Investor positioning is bearish towards China.
• The base case for the US economy is for a soft landing (i.e. inflation comes down without central banks having to inflict severe economic damage).
• Investors expect bonds to outperform equities in 2024.
• Yield curves for most developed markets point to rate cuts in 2024, but with policy remaining above current estimates of neutral.