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.