Too Good To Be True?

Key points

  • What's priced in? Strong equity returns in recent months reflect a shift in market focus towards the AI theme, earnings, and growth potential over the inflation and rates narrative. Market pricing is currently most aligned with a soft-landing economic scenario.
  • Less inflation frustration ahead? Alternative data indicators show signs of continued progress in core inflation normalizing. Some economic activity measures have started to cool, but key recession signposts like broad-based layoffs haven’t arrived.
  • Equity market opportunities: We see room to run for the AI theme but are focused on taking a more selective approach to identifying winners in the space. As market breadth improves, we are positioned to take advantage of a broader equity opportunity set.

Equity returns have defied expectations in the first half of 2023. Despite a backdrop of banking stress, rising recession risk, and materially tighter monetary policy than expected at the outset of the year, equities have continued to march higher.

The relatively narrow shape of the market rally, along with continued macro uncertainty, has raised key questions for investors. Do equity markets and the artificial intelligence (“AI”) theme that’s driven the bulk of year-to-date gains still have room to run? Can the US economy continue to avoid a recession? Or is the soft-landing scenario priced into equity markets too good to be true? In this quarter’s Systematic Equity Outlook, we use alternative data insights to answer these questions and what they may mean for markets and portfolios in the months ahead.