DIFFERENCES: There is a widespread belief that the US is set for a positive year of interest rate cuts and accelerated profit growth, with returns from the American market likely to significantly exceed current single-digit consensus predictions. However, the similarities with last year’s rally end here, for the following reasons: firstly, returns are likely to be lower than in 2023, when the S&P 500 increased by 26 percent (a rise twice the long-term average). Secondly, we might see returns in the second half of 2024, as the markets “digest” recent increases, grapple with real risks currently present in the market, and wait for confirmation of interest rate cuts around mid-year. Thirdly, we are witnessing a major shift in stock market leaders, moving away from tech companies towards cyclical and cheaper assets, most sensitive to interest rate cuts. Lastly, thanks to this, Europe and emerging markets are likely to do better in comparison to the US market dominated by the tech sector.
RISK: We are currently dealing with balanced risk, with the possibility of disappointment in the pace, but not the direction of interest rate changes. The current consensus predicts six aggressive cuts this year, starting as early as the first quarter – for both the EBC and the FED (double the “dots” of the FED). In the meantime, investor sentiment is no longer contrarian (i.e., opposing the general mood of investors and trends). Idiosyncratic factors driving profits from AI-tech trends to lesser inflationary pressures on margins should be apparent in the upcoming earnings season, while lower inflation and interest rates should help keep stock market valuations above average.
JANUARY: Historically, this is one of the best months of the year and usually sets the tone for the whole year. This so-called “January barometer” is not infallible, but has a significant success rate – at around 70 percent. However, there is short-term risk associated with verifying reality, which stems from the protocol of the FOMC meeting on December 13. The protocol proved to be more “dovish” than Powell’s observed turn. Last Friday’s US employment data with possible slow decreases and estimated inflation increase in Europe are unlikely to confirm the six aggressive interest rate cuts scenario currently priced in on both sides of the Atlantic.
Ben Laidler, global market strategist at eToro
