ACTV - 2024 Global Market Outlook: Q3 Update Three-Scenario Problem

2024-06-26 15:24:00 ET

Summary

• Our base case scenario is for the U.S. economy to achieve a soft landing, but we still see a 35% probability of a recession over the next 12 months.
• Conditions are improving in most other developed economies, including in the eurozone, the UK, and Japan, as they catch up from relatively lackluster post-Covid gross domestic product growth trajectories.
• We do not see extreme tactical opportunities across equity regions, sectors, or styles.

There is still no clear answer to this year’s key question: is the U.S. economy headed toward a no, soft or hard landing? We see plausible reasons why any of these scenarios are possible.

What are the different outcomes for the U.S. economy?

The reacceleration (no-landing) case is supported by above-trend jobs growth, double-digit expectations for corporate earnings growth and inflation that remains stuck above 2.5%.

The potential for a soft landing or a period of below-trend growth is backed by the slowdown in forward-looking labor market indicators . These include hiring rates, the cooling in wages growth that will depress real household incomes, and signs of distress from low-income consumers indicated by rising default rates on credit cards and auto loans.

The case for a hard landing (recession) relies on historical precedent. The U.S. Federal Reserve (Fed) has embarked on the most aggressive tightening since former Fed Chairman Paul Volcker’s tenure in the early 1980s, and the yield curve (10-year minus 2-year) has been inverted since mid-2022. This is a classic recession warning sign: the U.S. economy has never previously avoided recession after a sustained period of restrictive monetary policy....

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