Pent-Up Exuberance

Executive summary:

  • We think it's more likely than not that the U.S. avoids a recession in 2024, but economic uncertainty remains high with the economy running at full capacity, household savings diminishing, the labor market slowing down, and the U.S. Treasury yield curve still inverted.
  • The U.S. Federal Reserve, the European Central Bank and the Bank of Canada could begin cutting rates by June. We think the Bank of England and the Reserve Bank of Australia may follow suit in the third quarter of the year.
  • Amid an uncertain economic outlook, we're emphasizing the importance of security selection and diversification as the second quarter unfolds.

We believe optimism over a soft-landing scenario—where economic growth slows but a recession is avoided—may deliver more near-term market gains, as inflation declines and central banks look to start easing around mid-year. However, we think the risks of a sharper economic slowdown later in 2024 are elevated, as the lagged impact of previous interest rate rises has yet to be fully felt.

Key market themes

Raphael Bostic, president of the U.S. Federal Reserve Bank of Atlanta, coined the phrase pent-up exuberance in a recent speech. While Bostic was referring to the risk of renewed economic acceleration, we believe the term also captures the mood of markets, as exuberance about the surprising robustness of the economy spills over into investor enthusiasm. Coupled with declining inflation and solid corporate profits—particularly for AI (artificial intelligence)-themed mega-cap stocks—investors who were fearful of a recession in 2023 are being drawn into the market, with the positive momentum having the potential to push the S&P 500® Index to further record highs.