Us Equity Outlook: Opportunities for Active Management

For those investors who entered the year expecting a continued regime shift away from growth equities, 2023’s equity market performance likely came as a surprise. US equities broadly posted double-digit returns through November 2023, with growth equites climbing roughly 36%.1 Those initial expectations were understandable as uncertainties about inflation, interest rates, global growth and geopolitical conflict dominated headlines and were top-of-mind issues for investors globally. As the year progressed, inflation moderated meaningfully, and the US Federal Reserve (Fed) slowed the pace of interest-rate increases in response to new data. Looking ahead to 2024, we expect inflation will continue to moderate and economic growth to slow; we remain positive and see the potential for rate cuts to come into focus in the second half of the year. Our outlook reflects an expectation for a soft landing. If the labor market remains healthy and unemployment hovers around 3%–4%, it is difficult to imagine a case where, if the United States does enter a recession, it is anything but shallow. That said, we continue to monitor consumer health along with corporate outlooks for signs of a weakening economy.

We believe 2024 will prove a positive year for US equites, driven by improving profit margins and rebounding earnings growth across most sectors. With current valuations not leaving much room for multiple expansion, a focus on relative growth and the ability to look beyond the concentrated benchmarks are where we see the greatest opportunities. As such, we believe 2024 looks particularly attractive for active managers where idiosyncratic factors drive returns outside of macro factors. In this environment, we believe investors should be focused on quality and earnings visibility and on areas of secular growth in the economy.

Several areas of focus for us in the new year:

Beyond the Magnificent Seven:2 We expect market breath to expand to include small- and mid-cap companies

A narrow group of mega-cap growth stocks, the often-called “Magnificent Seven” dominated US market returns in 2023 (Exhibit 1). These companies offered strong cash flows, competitive strength, and exposure to Generative artificial intelligence (AI). While we continue to view these companies as market leaders, we do not think the level of relative outperformance for these stocks is sustainable. The outperformance of such a narrow group of companies has created an opportunity for active managers who are able to look beyond the benchmarks. We see 2024 as a year where market breadth will expand and small-, mid- and large-cap companies will take the spotlight.