2024 equity outlook

We are constructive on equity markets in 2024. Drivers include the likelihood of a soft landing in the United States, evidence that interest rates have peaked, and the economic outlook in China, which appears to be past the worst. We favor global equities ex-US, emerging markets and smaller companies.

A busy global election calendar spread across the year is a source of risk for investors, as are geopolitics. As the impact of higher interest rates and slower growth takes effect across the globe, earnings uncertainty is likely to rise. This is an additional source of risk given analysts are forecasting earnings growth globally to turn positive in the year ahead.

Drivers of optimism

In our view, a soft landing for the US economy is increasingly likely given the healthy state of corporate, household and bank balance sheets. These have been buoyed by rising corporate margins, elevated savings, and manageable non-performing loans. Corporates have generally been able to weather the increased cost of debt as they did not borrow excessively when interest rates were low.

The rate of consumer price inflation in the United States has declined from 6.4% in January 2023 to 3.2% in November.¹ Medium-term Inflation expectations have remained well-contained, falling to 3% in October 2023.² In combination with recent signs of softness in the labor market, there is increasing evidence to support the view that US interest rates have peaked. Over the past 30 years, the US Federal Reserve (Fed), has on average cut interest rates 10 months after the last increase. Based on history it is thus likely the Fed will cut interest rates around the second quarter of 2024, which is in line with current market expectations.³

Over the past 30 years, global equity markets have on average risen 5% in the 12 months following the first Fed rate cut, with emerging markets returning 27% over the same period.⁴ In the 24/36 months following the first rate cut, global equities have risen 17%/15% and emerging markets rose 27%/23%.⁵

Expectations of the peak in the interest rate cycle and potential easing have already had an impact on the US dollar, which in the current cycle peaked in October 2022. A weaker dollar creates easier financial conditions outside the United States as it reduces the cost of debt in local currency terms, and this will typically encourage capital flow out of the United States in search of higher returns.

Global ex-US equity outlook

Investor sentiment toward European equities remains depressed, with valuations below the long-term average. Growth remains soft as higher energy costs and the lagged effect of higher interest rates weigh on corporate and household balance sheets. Nevertheless, we note that over the past 30 years, European equities posted double-digit returns in the 24/36 months following the first Fed rate cut, and returns over 12 months have been positive.⁶

Japanese inflation expectations are broadening across the economy for the first time in decades, which is good news for corporate pricing power. Equities are expected to continue benefiting from the significant corporate reforms the Tokyo Stock Exchange has implemented, the unwinding of cross shareholdings, and the increase in payouts to shareholders. The Japanese Business Federation has also set out its proposal for tax reform, including reforms impacting capital expenditure, venture capital and green transformation.⁷ While Japanese market valuations have risen, they remain in line with global ex-US equity markets.⁸ 

Emerging market equities ex-China have been resilient in the face of one of the fastest US rate-hiking cycles on record. This reflects significant reforms over the prior decades, robust domestic consumption and healthy balance sheets. India and Mexico stand out as benefiting from prior reforms, which has attracted foreign investment and raised capital expenditure. South Korea and Taiwan could see a significant recovery in the year ahead as the technology cycle turns more favorable, driving earnings higher.

The Chinese economic outlook remains challenging; however, it looks like the economy is moving past the worst. While a swift rebound in growth is not anticipated, investors will welcome clear signs of a bottoming in growth.

Geopolitics and elections

In 2024, more than four billion people will take part in elections, starting with Taiwan in January and culminating with the United States in November. Voters will also go to the polls in India, Indonesia and Mexico, as well as in many other countries. Each election presents risks and opportunities; however, we think those in Taiwan and the United States are likely the most important for investors to watch. The Indian election is expected to see the incumbent BJP party returned to power, as the benefits from widespread reforms continue to cascade down to households and corporates.

Recent years have witnessed elevated geopolitical risks for investors. These include the Russia/Ukraine war, the war in the Middle East as well as tensions in East Asia. It is possible the Russia-Ukraine war will turn into a frozen conflict. Such an outcome, while unsatisfactory, could lessen energy and commodity price volatility, benefiting Europe and select emerging markets.

Earnings

Consensus expectations for global earnings growth is close to 10% in 2024,⁹ led by the United States following flat earnings in the prior year.¹⁰ By contrast, emerging market earnings growth is expected to accelerate to 18% in the year ahead, driven by South Korea and Taiwan.¹¹ This represents a sharp recovery from the contraction in emerging markets earnings growth in 2023.

Global equities ex-US to outperform

Our constructive view toward equities in 2024 focuses on global ex-US, emerging markets and smaller companies. Price-to-earnings (P/E) valuations for these categories are below their long-term averages, with the MSCI USA Index trading significantly above its long-term average P/E.¹² On a relative basis, the P/E gap between US and global ex-US equities is close to its highest level in over 20 years.¹³