In our second-half outlook, published in June, we characterized global markets as facing a balancing act. Our view was that for markets to rally further, the Federal Reserve would need no more than two additional rate hikes, the US recession would need to be averted, and the rally in stocks linked to artificial intelligence would need to be sustained.
In the three months since, inflation has receded, meaning the Fed and other major central banks are closer to the end of their tightening cycles. The US labor market has cooled, but not so much as to push the economy into a recession. Earnings have improved, with US-listed company profit expectations now back at all-time highs. Yet global equities are little changed over this period, and bond yields remain elevated.
In our view, this creates an opportune moment for investors. Against a supportive backdrop for stocks and with bond yields high, we expect decent returns across asset classes: 8–10% for major global stock market benchmarks and 10–15% for major high-quality bond indexes in US dollars, sterling, Swiss franc, and euro by June 2024. And by diversifying, investors can also earn these returns while reducing exposure to potential risks.
Of course, cash offers good current yields. But while we expect bond and stock returns to prove durable, the high interest rates on cash today are likely to drop in the next 12 months. Taking a longer-term view, we expect cumulative cash returns of just 5–14% depending on currency over the next five years, versus cumulative returns of 15–25% in bonds, 40–55% in stocks, and 25–65% in alternatives, based on our Capital Market Assumptions.
Risks remain. Inflation is still above official targets, and rising oil prices threaten to keep it elevated over a longer period. It is unclear if or when the interest rate hikes that central bank have enacted will begin to have a larger effect. China’s economy has disappointed. And yet another US government shutdown is possible in October.
But for investors who carefully construct multi-asset portfolios, these risks are navigable. By reviewing and balancing exposures, investors can tap into today’s attractive opportunity set across asset classes, position for durable returns for years to come, and mitigate the effect of potential risks.
