Wealth Outlook 2024 - Slow then grow

20 Wealth Outlook 2024 | Our outlook Slow then grow Employment growth down, output up As labor markets cool off, we think corporate profits will heat up. Many cyclical industries contracted output in 2023 even while hiring across the economy rose. As consumer spending slows in 2024, that will leave firms in a position to boost production. After all, large declines in global trade anticipated a consumer demand collapse that never occurred and left inventories contracting. Corporate profits have already risen for the past two quarters, and we see S&P 500 EPS over the next two years rising 12%. Shifts in the composition of industry demand and output play a larger role in the short-term than enduring technological innovation, but greater benefits could soon be realized on the latter front as well (see our pair of our articles about the Unstoppable Trend of digitization and how to invest in it, starting on pages 77 and 82 ) . This prospective improvement in corporate profits led us this past October to raise the equities allocation in our core portfolios to overweight from neutral for the first time since 2020. For now, the overweight is 2% and mostly centered on the US – but we suspect we’re being conservative. If the US dollar weakens along with falling interest rates, as we expect, and credit stays firm, equity returns could be significantly stronger and broader than we currently anticipate. This would suggest a higher global equity overweight if key conditions are met. Resilience, with some risks The US and the world economy overall have endured the impact of higher rates and other macro policy tightening better than we and many others expected. Compared to our forecast a year ago, the US economy has seen a sharp upward revision for 2023 by a full 11/2 percentage point in real GDP terms. The drop in US inflation from a peak of 9% has strongly helped US real incomes in the year past. By year-end 2024, we expect headline US CPI inflation to fall to 2.5%, from ~3.7% at year-end 2023. This slowing has boosted real incomes and sentiment at the same time savers have enjoyed a surge in real yields. Many of the world’s economies are likely to experience the same deceleration in inflation given the normalization of supply chains and trade. This inflation drop can’t be counted on to boost economies quite as forcefully as in 2023, but other tailwinds may increase globally on a lag from the US as we move deeper into the year and then into 2025. — After-inflation US Treasury yields of 2.5% are currently higher than 80% of all periods in the past 25 years. The inversion of the US yield curve, even if less pronounced than before, remains an indicator of tight monetary policy. This can leave the economy more vulnerable to a shock, as was the case when the pandemic hit. Another supply shock that tips the economy into a broader recession can never be ruled out given geopolitical uncertainties. If a new, global shock were to materialize, monetary easing could be more profound than we expected, but it would be no immediate substitute for economic growth and profits. Assuming no imminent recession or major global supply shock, it seems likely that the Fed will ease monetary policy gradually in the coming few years. This should be consistent with 10-year US Treasury yields falling back somewhat, perhaps to 3.75% by