IEF - IShares Spring 2024 Investment Directions

2024-04-08 09:00:00 ET

Summary

• Looking forward, our base case is that the Fed engineers a soft landing and starts to normalize policy rates in the second half of the year.
• In recent quarters, large-cap technology has outperformed in both higher and lower rate regimes.
• The weight of higher rates can still be observed in small-cap equities and non-AI exposed sectors, where higher rates and expectations of slower real growth have dampened earnings expectations and therefore performance.

By Gargi Pal Chaudhuri

Macro

The U.S. economy has evolved largely as we anticipated in our 2024 Year Ahead Outlook , with inflation remaining stubbornly above the Fed’s target while economic growth is slowing but still solid. What has changed since our last report is that downside risks to growth have largely diminished, buttressing our long-held view that investors are best served by staying invested in a diversified portfolio vs. trying to time the market - or the Fed.

Our investment preferences can be found below, but when it comes to the central bank, we maintain our long-held view that the Fed will deliver three policy rate cuts in 2024. However, the risk of only two cuts now appears higher to us than the risk of four cuts. In their latest Summary of Economic Projections , the FOMC reaffirmed expectations for 75 basis points of rate cuts this year but upgraded their outlook for near-term growth while reaffirming their expectation that inflation won’t hit their 2% target until 2026. ¹

While core inflation continues to trend lower over the longer term, the Fed has expressed caution given the near-term upswing in 3-month annualized core CPI ( Figure 1 ). Similarly, longer-term growth has generally trended lower since the stimulus and reopening-fueled growth of 2021; nevertheless, growth has remained persistently above the longer-run ‘neutral’ pace expected by FOMC members .

Figure 1: The path to lower inflation proves its stickiness

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