Investor sentiment

2024 Strategist Outlook: July Surprise

July 28, 2024 - 23 min read

Executive Director, Natixis Center for Investor Insight – Natixis Investment Managers – US Distribution

In the midst of an unprecedented election cycle, all eyes will be focused on the US in the second half of 2024, as market strategists project the US presidential election to present the greatest risk and the US market to provide the best return opportunity.

A midyear outlook survey conducted between June 26 and July 9 with 30 market strategists in the Natixis Investment Managers family places the uncertainty surrounding the US presidential election at the top of their risk concerns, with 37% rating it a high risk and the same number counting it as a medium risk.

After seeing first-half returns of 15.3% for the S&P 500^® and 18.6% for the NASDAQ¹, few strategists think the rally will be upended by politics. In fact, two-thirds (67%) project the US market to offer the best returns in the second half.

Artificial intelligence (AI) counts among the key performance drivers, with strategists based in the US and Europe calling for information technology to be the top-performing sector. Even still, they project the impact of AI to move beyond the walls of the tech sector, as 60% of strategists predict that the impact of AI will be ubiquitous in markets by year-end.

Most notable in the sentiment is a lack of concern about recession globally, with 73% calling it no risk (10%) or low risk (63%), up from last year’s 50% combined average for no and low risk. With inflation easing and real growth inching forward in most regions, soft-landing scenario looks more likely, and two-thirds (67%) of those surveyed say there will be no recession in the next 18 months.

On the surface, strategists appear to place more weight on the impact of politics on markets than economic policy. In reality, politics is a springboard into what could disrupt an H2 outlook marked by a positive macroeconomic forecast and clear projections for markets and asset classes.

Politics: The US election may be their top risk concern, but with Russia’s war with Ukraine now well into its third year and Israel’s action in Gaza closing in on the one-year mark, 80% of strategists worry that geopolitics could also be a headwind for markets in the second half.
Policy: Inflation may be a lingering concern, but only 17% rank it as a high risk while 47% see it as a medium risk. Strategists are more concerned about how central banks will wind down the rate hikes implemented to cool rising prices. More than three-quarters (77%) of those surveyed say they more worried about a higher-for-longer scenario than any potential cuts.
Performance: Looking at equities, strategists anticipate the US to top other markets, for growth to outperform value and for large-caps to outperform small-caps. In fixed income, quality is the watchword, as strategists favor government and investment-grade corporates over riskier high-yield and emerging market securities. Calls for precious metals and absolute return strategies as top alternatives suggest the need to diversify the risks.

The discussion may start with politics, but strategists recognize it is just the first layer of a complicated investment blueprint that, if executed well, could potentially deliver positive results for investors.

All politics are local… and global

Politics weighs most on the minds of strategists as they look at the risks investors are facing in the second half of 2024. Of all that they are worried about, strategists rank the upcoming US presidential election as either a medium (37%) or high risk (37%).

While strategists based both in the US and Europe agree that the US election is the top risk in H2, they are less certain about what it will mean for markets. Even before President Biden bowed out of the race, 47% were concerned that the election could be a headwind, while 23% saw it as a potential tailwind. However, another 30% think the election is more noise than signal for markets, with Biden’s departure from the race likely to amplify the static. Asked to predict how it will shape up at year-end, 60% of those surveyed think the US election is more likely to weigh on the market rather than support it.

Elections matter to markets

While many times market watchers will say that elections do not have an immediate effect on the markets, 77% of those surveyed say elections do matter to markets. One reason for concern may be the potential for turmoil if election results are not clear, as only 53% think the election will be settled on election day.

Inflation, which has returned as an issue in an election year for the first time in decades, is among strategists’ top fears. And, relatedly, some 47% worry about “politization” of the Fed as it makes rate-cut decisions.

Geopolitics as big a risk as consumer spending

While the US elections pose challenges, strategists think geopolitics are even more likely to be a headwind for markets. The Ukraine war, the Gaza-Israel conflict, and US-China relations all factor into investment concerns, and 80% of those surveyed worry geopolitics will be a headwind for investors in H2. In fact, 47% think geopolitical conflict is just as likely as consumer spending to be what ends the market rally, making them the two top factors they’re watching. Even still, not all geopolitical sentiment is negative, the majority believe the US-China dialogue will continue (73%) instead of breaking down (27%).

Will policy make the numbers add up for investors?

Politics may present some key questions for strategists as they consider prospects for the rest of the year, but in the long run, economic and fiscal policy has more impact on their market perspective. Looking at the next six months, strategists are considering how policy will impact four key macroeconomic factors: inflation, interest rates, public debt, and economic growth.

Inflation easing but concerns remain

Inflation has gradually eased over the past two years, but Natixis strategists are still concerned. Eurozone inflation has declined from its 2022 peak of 10.6% to 2.6% in May and 2.5% in June. In the US, Core CPE, the Fed’s preferred measure, came in at 2.6% YOY for May for the smallest increase since March 2022.¹ Despite these positive signs, strategists still see inflation as a risk for investors.

Overall, 47% of those surveyed categorize inflation as a medium risk for H2, while 17% rate the risk as high. With markets on a tear, 40% are worried that an inflation surprise could end the rally. When it comes down to it, inflation may be improving but it is taking time, and just 7% of those surveyed think the Fed will reach its 2% target by year-end.

Consumers may still feel the pinch of higher prices in H2, but some will feel more pain than others. Overall sentiment shows that strategists think the impact of inflation has been felt disproportionately: 37% think Generation Z (born 1997–2012) has felt the bite of higher prices more than others, while another 17% say it’s been hardest on Millennials. Only 23% believe the impact has been felt equally. One example of how inflation has hit Gen Z harder is the soaring price of real estate in markets around the globe, which has put rents out of reach for many 20-somethings.

Oddly enough, it appears that Generation X is once again the forgotten demographic, as not one respondent thought this group, which is stuck between the expense of raising children and the cost of caring for elderly parents, is being hurt the worst.

What age group is inflation hurting the worst?

“Higher for longer” the key rate concern

With inflation easing, Natixis strategists say they are more concerned about interest rates staying higher for longer (77%) than for central banks to be too aggressive in their cuts (23%). Their concern is further reflected in the 63% who are more worried about the number of cuts than the timing of any cuts.

Most importantly, strategists think rate changes have to be managed across regions and are more worried that rate cuts will be under-coordinated (60%) between central banks, rather than over-coordinated (40%). Sentiment shows that few of the strategists are worried that banks will fail to deliver, as 50% put a central bank mistake as either no risk (3%) or low risk (47%). Fewer still are worried about issues stemming from balance sheet management, as 80% rate a Quantitative Tightening tantrum as either low risk (60%) or no risk (20%) in H2.

For the most part, prospects for rates cuts favor less aggressive policies: 70% project two cuts from the European Central Bank, and 67% project two cuts from the Bank of England, though 30% think there will be no cuts there. In the US, they were more likely to forecast just one cut (53%) from the Fed than two (37%). Only 10% saw no Fed cuts in the wings for H2.

The view on Japan, where inflation has finally emerged after a decades-long battle against deflation, is significantly different. Overall, 57% say a rate hike is more likely from the Bank of Japan, and 27% see the central bank taking no action.

How many rate moves are you expecting in 2024?

Government debt unsustainable over the long term

Along with rising inflation and rising interest rates, another key policy factor has been on the rise as well: government debt. In the aftermath of massive cash injections to the economy worldwide during the pandemic, public debt soared.

Growing public debt is weighing on the minds of the strategists surveyed, and 70% say government deficits matter when they evaluate markets. The question isn’t if high debt levels are sustainable but rather for just how long. In terms of how it impacts their forecasts, Natixis strategists are split: 53% say debt levels are sustainable now but pose a long-term threat to the economy. Another 37% say levels are now unsustainable. Just 10% think debt levels are sustainable over the long term.

This long-range outlook comes across loud and clear in their thoughts on how government debt could impact the second half of the year, and sentiment is split. Only 3% of those surveyed go so far as to say government debt poses no risk in their outlook for H2. Another 47% call it a low risk. However, 50% say the risk is medium (40%) or high (10%).

Growth prospects greatest in US

Beyond their focus on the US for risk and return potential, Natixis strategists believe the US economy will continue to lead Europe in terms of growth throughout the second half. After experiencing a technical recession in the last two quarters of 2023 (-0.1% growth in the Eurozone), the EU saw a slight turnaround at the start of 2024, registering 0.3% growth in Q1.¹

While the EU looks less stagnant, Natixis strategists believe the region has a long way to go before it can catch up to the US, which delivered 2.5% growth in 2023 and opened the year with 1.4% growth in Q1. The Atlanta Fed GDPNow model is now tracking over 2.5% growth in Q2.¹ Nine out of ten of those surveyed believe that Europe will not be able to catch up to the US by the end of 2024.

Looking at China, where growth topped out at a modest (by China’s standards) 5.2% in 2023¹, less than one-third of those surveyed believe growth will recover – this after the Chinese economy missed estimates of year-over-year growth of 5.1% and came in at just 4.7% in Q2 2024.¹

Given these growth prospects globally, it’s not surprising that almost three-quarters of those surveyed believe the US dollar will strengthen in the second half of the year.

Positive market outlook partially clouded by uncertainty

With so much to consider on the politics and policy fronts, Natixis strategists have a measured view on market performance. On one hand, two-thirds believe corporate earnings will provide a tailwind for markets in the second half of the year. On the other, the same number worry that markets are too optimistic. This dual view comes across particularly in their view on equity market prospects for H2.

Equities: AI adds fuel to tech boom.

In terms of where in the world they expect to find outperformance, two-thirds of those surveyed say the US stock market will deliver the best results in H2. Just 10% see it coming from the UK while 10% also see China delivering the most attractive returns. And as Europe continues to slowly climb out of stagnant growth, only 3% see stocks there coming out on top. The same small number are expecting emerging markets to be ahead.

Top-performing market in H2 2024

While they believe returns will be less concentrated, 60% believe the all-tech-all-the-time market mindset will continue with their call for information technology as the top-performing sector for US markets in H2. Just 13% think consumer staples with be the top sector, while just 10% are looking at healthcare. None thought the financial sector would outperform.

Given muted expectations for equities in Europe, there are no strong feelings about the return potential of any particular sector. Unlike the US market, only 10% think tech will provide the best returns in Europe. Most promising may be financials, which 20% expect to drive returns, healthcare (17%) and consumer discretionary sector (13%) are other areas where they see more attractive return potential.

Where Natixis strategists see the greatest return potential in equities

Asked what three factors they worry could bring the market rally to a close in H2, strategists are equally split between the impact of geopolitical conflict (47%) and slowing consumer spending (47%). Another 40% worry about an inflation surprise, and 37% point to valuations.

While they are concerned about the risks posed by the US election, only 30% of strategists believe politics and elections will be what ends the rally. With a soft-landing scenario becoming more and more likely, just 20% worry about the prospects for recession, but not one respondent thinks recession will kill the rally. According to 27% of those surveyed, a more likely outcome for H2 is that markets cool and equity prices move lower due to higher-for-longer rate outlooks.

AI: Will the machines take over?

Since the arrival of ChatGPT and other chatbots in late 2022, generative AI has been a catalyst for tech growth and especially for the likes of chipmaker Nvidia. Strategists are beginning to worry that the rush to AI has the potential for creating a new tech bubble. While only 7% see it as a high risk in H2, 47% rate the risk as medium. Another 43% think it will be a low risk through year-end. Only 3% are comfortable saying there is no risk of an AI bubble whatsoever.

Even as AI innovation and adoption are progressing rapidly, strategists are keeping an eye on its long-term effects not just its effect on markets, but also their own business practices. In fact, 80% believe AI will help them uncover new opportunities that were otherwise undetectable, while 70% believe it will help them detect unknown risks. One-fifth (20%) see a darker side of AI, saying it will take their job in the next two to five years.

Strategists project AI will have a significant impact on markets in the same time frame: Three-quarters of those surveyed (73%) think AI will alter traditional market patterns, while even more (77%) think it will accelerate day trading.

Few think the impact of AI is readily apparent across markets today, as 97% think AI needs to realize its full potential. How long that will take remains to be seen, as 40% of those surveyed think the impact of AI will be contained in the tech sector in H2, and 60% think that at the end of 2024, the impact of AI will ubiquitous.

But the potential of AI does not come without risk: 93% believe ever-expanding AI capabilities will increase the potential for fraud and scams in the coming years, and many long-range concerns are focused on the societal impact of AI.

Name that tune: AI edition

Asked to choose a song that best represents their views on AI, 37% selected 1980s anti-nuclear war anthem “99 Luftballons,” to indicate their concern that an AI mistake will have unintended consequences. Another 23% chose REM’s “It’s the End of the World as We Know It,” a title chosen to reflect concerns that machines will take over.

Another 20% chose the Bowie/Queen collaboration “Under Pressure,” to represent concerns that AI could take over many jobs. Few see any upside: Only 13% selected ABBA’s “Money, Money, Money” to indicate their view that the future of AI is all about generating profits. And just 7% saw the potential for AI to make for a better world with Louis Armstrong’s “What a Wonderful World.”

What song describes the future of AI?

Quality the key focus for fixed income

On the fixed-income side of the equation, higher rates have given a resurgence to bonds, providing some of the best yields in more than a decade and returning bonds to their traditional role as a portfolio diversifier. In short, the message has been “bonds are back.”

As Natixis strategists look at fixed income in the US, rates continue to shape the discussion. Strategists are split in where they think the best return potential may be, but all their top picks indicate a preference for quality as the same number (23%) are calling for core short government bonds, core long government bonds, and investment grade corporates to deliver the best returns in H2.

Fewer see the risk reward trade-off working in favor of bonds with more exposure to credit risk, as only 13% think high yield bonds or hard currency emerging market debt offer the best returns. Just 3% think local currency emerging market debt will be best for returns.

Investment grade corporates come out on top in preferences for Europe, as 27% see them as having the best return potential. And while only 13% see core short government bonds and 17% see core long government bonds as delivering the best returns, just 20% think the risk premium of hard currency emerging market debt offers the best potential in H2.

As seen in projections for top-performing bond classes, opinion is split as to whether long-duration or short-duration bonds outperform. And even as some market watchers begin to speculate about the challenge of refinancing debt at higher rates, only 3% of strategists are concerned about the potential impact of a corporate debt maturity wall.

Where is the best fixed income return potential in H2?

What investors need to know about cash, rates and bonds

Higher rates have led many retail investors to turn to the “sure thing” presented by short-term cash instruments offering the highest rates seen since the turn of the century. But Natixis strategists are quick to remind individual investors that there is no free lunch when it comes to investing.

When asked for the top risks investors may be missing about cash, 53% said investors should know there are more attractive returns to be found elsewhere – the proof is in first-half returns of 15.3% for S&P 500^®, 18.6% for the NASDAQ, 13.3% for the FTSE All-World Index, and 18.28% for the Nikkei.¹

Another 43% point to the risk of reinvesting at a lower rate when current holdings mature. And the same number point out that inflation can reduce the real return investors get from cash.

Looking at bonds right now, 67% of selectors say investors should understand that bonds can be used to generate both income and total return. Another 57% say investors should know that active management can add value to bond portfolios through careful security selection and active duration management. And with rate cuts on the horizon, 50% of those surveyed say now is the time to start extending the duration of bond portfolios.

Now with rates finally above post-financial-crisis lows, strategists say it’s important to understand that bonds offer diversification once again. And with given risk and uncertainty in the market, 40% say credit quality is becoming more important.

Alternatives: Added diversification needed to outperform

Given the complex risk picture for H2, it’s likely that alternative investments will play a more prominent role in investor portfolios. Six in ten of Natixis strategists say a portfolio constructed with 60% equities, 20% fixed income, and 20% alternative investments will outperform the traditional 60:40 stock and bond portfolio.

Their calls for the top opportunities in alternative investments suggest slightly higher hopes for those that can offer higher level of diversification and risk protections vs. those with the potential to boost returns.

The largest number predict that precious metals and absolute return strategies (17% in the US, 20% in Europe for both) will outperform, indicating that strategists see the potential for these traditional risk mitigators to deliver both in terms of downside protection and, in the case of precious metals, a hedge on political uncertainty.

A slightly smaller number of strategists also see potential for private debt (13% in the US and 13% in Europe) and private equity (13% in the US and 10% in Europe) to deliver returns for investors in H2.

In the US, strategists also see the potential for options-based strategies to deliver the best returns, suggesting some may anticipate an uptick in volatility as second half-risk concerns play out.

Little concern over real estate

The real estate sector has been under close watch since the pandemic, as low interest rates led to a white-hot residential market and shifting work patterns cooled commercial markets. Adding to the discussion of the sector is China, where after developers’ debt problems and slowing sales, many are asking if the bubble is about to burst.

Natixis strategists are not overly concerned about any of these real estate markets in H2: 80% believe the risk of a housing crash is either low (73%) or no (7%) risk. They rate risk in the US commercial market as low (40%) or medium (47%). And rate the Chinese residential market as either low (50%) or medium (30%) risk.

Sustainable investing: Investor demand outweighs political pressure

The only place in the entire survey where Natixis strategists are in 100% agreement is their belief that politics will continue to divide opinion on sustainable investments. Over the next two to five years, half of those surveyed think the fate of sustainable investments will be determined by investors, saying consumer demand will outweigh political pressure.

With sustainable investing at the center of heated political debate, 57% believe regulations related to these investments will get stronger. What those new regulations are and how they’re implemented depends on where you are, as only 10% believe the EU and the US will align on regulatory requirements, definitions, and reporting frameworks.

Reporting data is one place strategists think there will be more consistency. Two-thirds (67%) of those surveyed believe that data providers for environmental, social and governance (ESG) scores will converge and there will be fewer players in the next five years.

Looking ahead, 43% believe it will be over the next two to five years that the real ESG leaders will rise to the top. In that same time frame, 43% think engagement will be the real game-changer.

In the coming years, 60% say they expect impact investing will continue to expand. And speaking to the geographic split on sentiment, another 50% think asset managers will need to have a net-zero commitment in order to win business in Europe and Asia.

Few (20%) see that sustainable investing will be adopted as a standard integrated into all portfolio strategies.

The road ahead

The uncertainty of the US election cycle and geopolitical disruption may loom over markets in H2, but Natixis strategists see that the fate of markets will more likely be determined in the details of economic and monetary policy. Inflation may have eased, but interest-rate cuts will need to be coordinated by central banks to complete the soft landing.

In markets, strategists look for the US to lead in stocks and AI to drive tech. Quality is the watchword for fixed income, as they look to government bonds and investment grade corporates to outperform. In alternatives, strategists suggest that investors will need added diversification to address the added uncertainty of H2.

About the Natixis Strategist Outlook

The 2024 Natixis Strategist Outlook is based on responses from 30 experts including 25 representatives from 12 affiliated asset managers, 4 representatives from Natixis Investment Managers Solutions, and 1 representative from Natixis Corporate & Investment Banking.

Michael J. Acton, CFA^®
Managing Director and Head of Research & Strategy, North America
AEW Capital Management

Francois Collet
Deputy CIO
DNCA

Jean-Charles Mériaux
Chief Investment Officer
DNCA Investments

Pascal Gilbert
Bond Fund Manager
DNCA Investments

Carl Auffret, CFA^®
Fund Manager, European Growth Equity
DNCA Investments

Nitin Gupta
Managing Partner, Co-CIO
Flexstone Partners

Michael Buckius, CFA^®
CEO, CIO, President, and Portfolio Manager
Gateway Investment Advisers

Adam Abbas
Portfolio Manager and Head of Fixed Income
Harris|Oakmark

James Grabovac, CFA^®
Investment Strategist, Municipal Fixed Income Team
Loomis Sayles

Brian P. Kennedy
Portfolio Manager, Full Discretion Team
Loomis Sayles

Lynda L. Schweitzer, CFA^®
Portfolio Manager, Co-Head of the Global Fixed Income Team
Loomis Sayles

Craig Burelle
Global Macro Strategist
Loomis Sayles

Elisabeth Colleran, CFA^®
Portfolio Manager, Emerging Markets Debt Team
Loomis Sayles

Lynne Royer
Portfolio Manager, Co-Head of the Disciplined Alpha Team
Loomis Sayles

Andrea DiCenso
Co-Portfolio Manager, Alpha Strategies Team
Loomis Sayles

Jens Peers, CFA^®
CIO of Sustainable Equities
Mirova (US)

Hua Cheng
Portfolio Manager
Mirova (US)

Rafael Calvo
Managing Partner, Head of Senior Debt and Co-Head of Origination
MV Credit

Christopher Hodge
Chief Economist, US
Natixis Corporate & Investment Banking

Jack Janasiewicz, CFA^®
Portfolio Manager and Lead Portfolio Strategist
Natixis Investment Managers Solutions

Garrett Melson, CFA^®
Portfolio Strategist
Natixis Investment Managers Solutions

Chris Sharpe, CFA^®
Chief Investment Officer, Multi-Asset Portfolios
Natixis Investment Managers Solutions

Mabrouk Chetouane
Head of Global Market Strategy
Natixis Investment Managers Solutions

Philippe Berthelot
CIO Credit
Ostrum Asset Management

Alexandre Caminade
CIO Rates, Inflation and Total Return.
Ostrum Asset Management

Axel Botte
Global Strategist
Ostrum Asset Management

Philippe Waechter
Chief Economist
Ostrum Asset Management

Mounir Corm
Deputy Chief Executive Officer and Founding Partner
Vauban Infrastructure Partners

Chris D. Wallis, CFA^®, CPA^®
CEO, CIO
Vaughan Nelson Investment Management

Daniel Wiechert
Client Portfolio Manager
WCM

¹ Natixis Portfolio Analysis & Consulting. FactSet.

“H2”: second half of the year

CFA^® and Chartered Financial Analyst^® are registered trademarks owned by the CFA Institute.

The data shown represents the opinion of those surveyed and may change based on market and other conditions. It should not be construed as investment advice.

S&P 500^® Index is a widely recognized measure of US stock market performance. It is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation, among other factors. It also measures the performance of the large-cap segment of the US equities market. It is not possible to invest directly in an index.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of July 2023 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

All investing involves risk, including the risk of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

Natixis Distribution, LLC is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.

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