Pushbacks and top tracks: A mid-year mixtape

Since the launch of our 2024 Mid-Year Outlook: A Strong Economy in a Fragile World, we’ve been talking to our clients across the globe.

Along the way, we’ve heard excitement about the year ahead, but also remaining questions. In the spirit of last week’s summer solstice and the kickoff of vacation travels, we’ve curated a “road trip playlist” to answer the top queries, concerns and challenges we’re hearing in regard to our view.

Before we dig in, here’s our view in short. Global growth is proving stronger and more durable than most expected. Despite sticky inflation, high rates and the fragility that comes with geopolitical and election uncertainty, most macro and market variables in developed economies remain solid.

Companies are posting stronger profits, labor markets are finding a better balance, and AI is just getting started. We think this backdrop will power stocks higher through the year. Yet if growth stumbles, bonds can provide stability. Investors should feel confident that their asset toolkits can support their long-term goals.

From that view, here are the five questions we’re hearing most, set to the tune of some of our favorite tracks.

Only big names are driving the rally. Is it a bubble?

Track: Don’t Stop Believin’ by Journey

Stocks have been on a rip higher since the market bottomed in October 2022, with the S&P 500 rallying close to 60%! So what’s the worry? If you didn’t hold mega-cap tech stocks, you missed half of it. We are seeing more companies join in this year, but the trend has largely continued: the week before last marked the first time on record that the S&P 500 rallied over 1.5%, while its equal-weighted counterpart fell more than half a percent.

That might feel like “a lonely world,” and it’s led many to this question: Is the stock market a bubble? We don’t think so. For one, unprofitable companies haven’t propped up this rally as in other bubble-like times. While a few companies may be driving the bulk of the rally, it’s been supported by underlying, high-quality earnings strength.

The AI boom has been loud. Could it go bust?

Track: Everywhere by Fleetwood Mac

AI is “everywhere.” Last week, Nvidia surpassed Microsoft to become the world’s largest company by market cap, now over $3 trillion. For some, this has triggered memories of the dot-com era.

While AI’s rollout will likely face challenges, we think it’s just making its start. Only 5% of U.S. companies are actively using AI today, according to the U.S. Census Bureau. Yet some 50% of the S&P 500 by market cap mentioned AI in their Q1 earnings calls. The flurry of AI investments could quickly generate cost savings and efficiencies, and if historical patterns hold, its economic impact might be felt in half the time it took for the PC and internet.

Many will question AI’s potential, just as with past technologies. In one famous example, Paul Krugman in 1998 (a winner of the Nobel Prize in Economics) predicted that “by 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.” The lesson: We think investing in AI requires patience.

Not all companies will be winners, and some that don’t yet exist will likely disrupt or replace incumbents. This makes thoughtful exposure, focused on companies that could benefit from increased productivity or revenue (or both), crucial.

Inflation lingers, rates are swinging. Are bonds worth it?

Track: Style by Taylor Swift

Investing in bonds over the past few years has felt like a “long drive with no headlights.” After the “higher for longer” rate reset pushed yields to their highest since the Global Financial Crisis, rate-cut bets and cooler data have brought U.S. Treasuries close to erasing their year-to-date losses. Elevated yields signal that the income and diversification power of bonds is back. However, fluctuations, especially with ongoing debates around inflation, government debt and geopolitics, may still cause volatility. Is it worth the hassle?

We’re believers that bonds “never go out of style”; it just matters how you use them. Investing in different pockets of fixed income, across the curve and risk spectrum, has its merits. Consider this: several central banks including the European Central Bank and Swiss National Bank have already got under way with rate cuts, and the Bank of England signalled last week that they likely won’t be too far behind. That means that cash rates on offer today likely won’t last much longer. Instead, short-duration credit can lock in still-elevated yields for longer. Meanwhile, given how far rates have reset, longer-duration bonds now offer meaningful diversification in the event of an economic slowdown.

With the right approach, we think investors can keep a “James Dean daydream look” in their portfolios’ eyes.

Are consumers actually solid? Signs point to slowdown.

Track: I Won’t Back Down by Tom Petty

If you just read the headlines, you might think the consumer is hitting hard times. Last Tuesday’s U.S. retail sales print was weaker than expected, with ex-auto sales falling -0.1% and the “control group” rising a modest 0.4%. The prior two months also saw downward revisions. Consumer sentiment recently took another hit, and many note rising delinquency rates. Adding to that, Q1’s earnings season saw household names in the U.S. such as Starbucks, McDonald’s and CVS warning of slowing demand amid higher rates and costs.

But a wider lens shows underlying strength. Consumer spending has slowed from its start-of-year clip, but remains solid thanks to income gains. While interest costs have risen, especially for credit cards and auto loans, 70% of American households’ debt is in their homes, and over 90% have fixed-rate mortgages, keeping overall debt burdens low. With 70% equity also in their homes, many Americans have reason to “stand their [spending] ground,” albeit more discerningly. Payment bellwethers such as Visa and American Express signaled the same during the last earnings season.