Wealth Outlook 2024 - Slow then grow

Wealth Outlook 2024 | Regional outlook Nothing to lose If the two top current contenders indeed receive their party’s nomination, it will set up a situation that hasn’t occurred since 1894 when Grover Cleveland won his rematch with Benjamin Harrison. If the current top polling candidates remain the nominee, whoever wins in 2024 will be a second-term president. First-term presidents tend to be more mindful of the economy (so as to get re-elected) while second-term commanders in chief have tended to focus more on foreign policy (where their lame duck status has less impact on what they’re able to accomplish). Stock market returns tend to be higher in year one of a second term than in a first but fade towards the end of a second term as the market often struggles amid succession uncertainty. Deficits and (global) uncertainty up At the time of this writing, neither party appears anxious to reform Social Security or let the tax cuts passed in 2017 sunset in 2025. Therefore, large budget deficits are apt to persist until pressure mounts enough to do something about them. On the one hand, higher rates and deficit spending have raised the interest expense the government must pay. On the other, with the Fed and foreigners owning less of this debt, this interest is increasingly being paid to private US investors, helping the US economy by increasing their interest income. Meanwhile, wars and US- China tensions persist. As a result, global policy uncertainty is likely to be higher than domestic policy uncertainty – or action. Equities US equities have gained 20.0% in 2023 through late-November after a poor showing in 2022, when they lost 18.1%. But 2023 market leadership has been centered on a short list of artificial intelligence (AI)-led tech names. We move into 2024 with a wide valuation gap between the market-cap weighted and equal-weighted S&P 500 as well as between the market-cap weighted S&P 500 and small- (S&P 600) and mid- (S&P 400) cap (SMID) stocks ( FIGURE 2 ). Our asset allocation is positioned for a broadening of equity performance. After a three-quarter profit recession ending in the second quarter of 2023, we expect final profits for 2023 to be up 0.9%. We look for corporate earnings to grow by 5.1% in 2024 and 6.8% in 2025. Until then, investors will likely seek out companies with improving prospects. We believe the growth segment of the SMID-cap space, where firms carry less debt in their capital structures, should benefit from earnings growth and narrowing valuation gaps. The stock market’s leadership should further evolve as short- and long-term interest rates move lower. • SMID cap stocks tend to performwell when investors sense that a decelerating economy is about to transition into an accelerating one after the Fed adequately pivots away from a restrictive policy stance. • Tech, media and consumer stocks often shine in the year after first Fed rate cuts as falling inflation helps improve margins. • If the US dollar declines, as anticipated, it would create a favorable backdrop for tech-enabled industrials and the miners of metals used to make electric vehicles. Some of these firms stand to benefit fromUS-China “Group of Two” (G2) polarization and the investments needed to bolster the world’s energy security. (See The implications of G2 polarization on global technology on page 98 ) • The most intense energy consolidation in more than two decades is underway as firms seek to strengthen their Permian Basin and South American holdings to navigate the period ahead. • Canadian equities tend to trade in line with other developed market ex-US equity valuations, so we have a neutral allocation there.