At a glance:

  • Expectations of Lower Returns: The strong performance of assets over the past four months has led to expectations of lower returns as asset prices need to justify their recent performance. Markets await the anticipated shift to falling interest rates.
  • Economic Outlook and Central Bank Policy: Economic growth in the US is slowing due to central bank tightening, but it remains surprisingly resilient, defying expectations of an imminent recession. There’s a concern about the increased concentration of top stocks in the S&P 500, potentially affecting market dynamics.
  • Considerations for Asset Allocation: Faced with assets performing better than expected, there’s a choice between using more optimistic assumptions for further gains or adjusting the asset allocation towards assets that have lagged or are perceived as less risky. A balanced approach to capital appreciation is preferred, considering various factors such as growth outlook, central bank policies, market pricing, and potential risks like stagflation.
  • European Equity Market Perspective: Despite pessimism surrounding European equities, there’s a more constructive view among some managers. European stocks, particularly those in sectors like technology, consumer products, and healthcare, face challenges but also offer positive earnings outlooks that aren’t reflected in current market pricing. The Euro Stoxx 50 has shown a positive start in 2024, rallying in euro terms, with challenges facing European companies potentially already discounted in current prices.


The strong performance of many assets over the last four months, and concerns about the state of the global economy, lead us to expect lower returns as asset prices need to justify the performance. The expected move to falling interest rates has provided some impetus to markets, which await such a pivot.

Inflation is trending down from elevated levels but is still above the ECB’s 2% inflation rate across all euro countries combined. Recently, some concerns have emerged in the market that the rate of decrease is slowing, and this remains to be seen over the course of the year. Less rate cutting for 2024 is now expected by the market compared to expectations at the start of January – this is a more realistic expectation. Managers currently guide 3.5 rate cuts expected from the ECB.

Economic growth is slowing from high levels in the US as Central Bank tightening takes effect, but it remains surprisingly resilient, especially considering the consensus expectation that the US economy was about to enter a recession. Increased index concentration in the S&P500 is a commonly cited market concern. The share of the top 10 stocks in the S&P500 has increased sharply and three-quarters of S&P returns in 2023 were driven by the ‘Magnificent 7’. This increased concentration can be adjusted either by the Mag 7 stocks weaken commonly cited or by smaller cap stocks strengthening relatively.

With many assets performing better than expected in such a short space of time, we are faced with a choice: use more optimistic assumptions to suggest further strong gains or change the Model Asset Allocation away from outperforming assets and towards those that have either lagged or are less risky. Having asked several questions about the outlook for growth, the timing and extent of central bank easing (and what happens when policy is eased), what is priced into markets, whether bubbles exist and whether the outcome of US elections matters for financial markets, we opt to maintain a balanced approach to capital appreciation.

For the past year, we have been operating in a world of rising GDP growth and falling inflation on a quarter/quarter basis. Stock markets perform quite well in this regime, while bonds and the US dollar tend to underperform. There are signs now that inflation is picking up again and as long as the US economy continues to grow quarter/quarter, developed market equities, emerging market equities, commodities and commodity equities tend to perform well. The big risk, and one we are watching closely, is whether we begin to see US GDP growth decelerate in the quarters ahead. If that happens, we will see the risks associated with stagflation, disinflation/deflation. Add in a US presidential election in November and we get a recipe for stock market volatility later in 2024. Overall, positive but volatile.

The United States tends to dominate the headlines whenever conversations about equity investing take place, and rightly so. US equities have handsomely outperformed all other regions for over a decade. As a result, the US now accounts for 71% of the MSCI World Equity Index. In this investor update, we focus namely on Europe. Despite the pessimism that European equities tend to attract, we share a more constructive view held by some managers.

European stocks, as measured by the SPDR Euro Stoxx 50 Index, are discounting zero earnings growth for the next decade. European companies face several significant challenges including volatile energy prices, China becoming a more competitive threat and carbon policies that impact certain sectors that are heavy users of carbon emissions. However, companies most directly affected by these headwinds – automakers, industrials, and utilities – account for less than 30% of the Euro Stoxx 50 Index today, down from almost 60% a decade ago. Examples include Siemens, Schneider Electric, BASF, Mercedes-Benz, BMW, and Volkswagen. The remaining 70% of the index includes companies in the technology, consumer products and services, financial, healthcare, food, and beverage industries, where analysts are forecasting a much more positive earnings outlook, which is not being reflected in market pricing today. Examples include ASML, SAP, LVMH, Sanofi, Nokia, Airbus, and Safran.

When you compare analyst earnings forecasts for US versus EU equities, the difference is stark. The S&P 500 is discounting double-digit earnings growth for the next decade, compared to zero for the Euro Stoxx 50. European equities also trade at all-time low valuations today relative to US equities. This is interesting particularly as the slow growers in the European market have almost halved as an overall weighting in the Euro Stoxx 50 compared to a decade ago. The Euro Stoxx 50 has delivered a positive start to 2024, rallying +8.5% in euro terms. We think the challenges facing European companies today have been adequately discounted in today’s prices.