2024 Global Market Outlook: The Twilight Zone

Executive summary:

  • It’s possible that a 2024 recession could be avoided, but we see recessions risks as remaining elevated in most developed markets.
  • We believe there is limited upside for equities amid expensive valuations and recession concerns. Government bond valuations, however, look attractive in the U.S., UK, Canada, Germany and Australia.
  • 4.5% GDP (gross domestic product) growth is anticipated in China next year with piecemeal stimulus likely to continue.

We believe markets may be overly optimistic about a soft-landing scenario in 2024 and that recession risks remain elevated for most developed economies in the year ahead. While this is likely to create headwinds for equity markets, we expect a more positive environment for government bonds.

Key market themes

A recent survey by Bank of America found that 74% of fund managers expect a soft landing—where economic growth slows but a recession is avoided—for the global economy in 2024. This optimism is evident in bottom-up consensus expectations for 11% earnings growth by S&P 500® companies in 2024, and in spreads on high-yield corporate bonds that are below their long-term average.

We’re not as confident that the all-clear can be sounded on recession risks, however, as households will soon exhaust their excess savings from the pandemic. Up until now, these savings have acted as a strong defense against U.S. Federal Reserve (Fed) tightening. In addition, significantly higher interest rates have become a constraint on new borrowing, which will create refinancing issues.

All told, this business cycle may be a case of this time is longer rather than this time is different with regards to the lagged impact of aggressive Fed tightening on the economy. While a recession in 2024 might be avoided, we see the risks as elevated. The world will likely enter the new year in a twilight zone between slowdown, possible recession, and recovery—where nothing is likely to be quite what it seems.

In the U.S., slower economic growth and the threat of a recession provide a cautious equity market backdrop. We think 10-year Treasury yields around 4.5% offer good value and expect recession risks to provide cycle support for bond returns.