Investors' Club Podcast: US tech upgraded to most preferred (9:42)
CIO's Sundeep, Wayne, and Jon on our US tech upgrade and where to find tactical upside.

Thought of the day

Next week, we will publish our Year Ahead 2024 outlook that will include our views across economies and asset classes, and answer to some key questions investors will face in the year to come. In this month's CIO monthly letter, we provide a glimpse of key views ahead of that publication and take a deeper look at equities, including changes to our positioning in the asset class.

Global stock market indexes have had a volatile ride over the course of 2023-with major indexes rallying in the first half of the year, powered by a few big technology stocks, before giving up some of that ground in the second half on a combination of fears about high interest rates and a slowing economy.

As we look to the next year, that leaves us with three big questions:

  • How should investors adapt stock portfolios to account for slowing economic growth?
  • What is the outlook for the technology sector, and how should investors position?
  • What will moves in the bond market mean for stocks?

First, while we expect slower economic growth to weigh on earnings growth among cyclical companies, we think quality companies-those with a high return on invested capital, strong balance sheets, and reliable income streams-will still grow earnings despite a tougher operating backdrop. History shows that quality stocks tend to outperform in environments of slowing activity, when the economy is in “late cycle.”

Second, we like the US information technology sector and upgrade it from neutral to most preferred. This partly reflects our bias for quality stocks: Many of the companies with the highest returns and the strongest balance sheets are in the IT sector. But it also acknowledges the signs from the latest earnings season that smartphone and PC demand is improving. The sector also offers exposure to one of the most compelling long-term investment opportunities today: artificial intelligence (AI). Concurrent with this move, we upgrade the US from least preferred to neutral within our regional preferences.

Third, in our base case we expect bonds to rally further in the year ahead. We believe that lower bond yields should be supportive of stocks, provided they do not coincide with a particularly sharp slowdown in economic growth.

Fixed income remains our preferred asset class, given the combination of attractive yields and the potential for capital appreciation if interest rate expectations fall. But we also see upside for equity indexes, supported by earnings growth among quality companies. Overall, we believe 2024 should be a good year for investors who put their money to work in balanced portfolios, with positive prospective returns across stocks, bonds, and alternative investments.