Upgrading Equities Over Bonds

So far this year, growth has remained remarkably strong while progress on inflation has stalled. As a result, market expectations of interest rate cuts have come down from six to two. To us, the economy’s resilience and the upward pressure on prices are signs of economic strength. In this environment, we see greater potential for stocks to outperform bonds. We recommend adding to stocks, both in the U.S. and globally, by reducing allocations to fixed income and natural resources. Let’s take a closer look.

With the unemployment rate below 4%*, the strength of the U.S. consumer is supported by a strong labor market. People are earning more, and their incomes are increasing faster than inflation. Interest rates are high relative to history but projected to come down as monetary policy becomes less restrictive over the coming months. Fed Chair Jay Powell has reiterated that the committee has no plans to raise rates further.

Economic strength is broadening globally, particularly in Europe and in China. Europe appears to have emerged from a technical recession. In China, deflation risks remain but the manufacturing sector shows some signs of progress. This ongoing expansion points to further upside for global stocks relative to bonds. Although U.S. stock valuations are high, we think equities will continue to rise if earnings growth remains strong. It’s important to note that the recent decline in stock prices resulted from a multiple correction rather than a downgrading of earnings expectations.

For these reasons, we are overweight stocks relative to bonds with overweight exposures across all major regions, including international stocks. Of late, global stocks have slightly outperformed U.S. stocks despite a stronger dollar. Stock valuations are reasonable outside of the U.S. and we expect global stocks to continue to outperform bonds as growth expands globally. We fund our stock overweights by reducing allocations to fixed income and natural resources.