How did our 2024 Mid-Year Outlook views play out?

It’s outlook season on Wall Street

It may be hard for some to believe, but there are less than 50 days remaining in 2024. For many of us on Wall Street, these next months of cold weather, holiday lights, and sweet treats also mean it is time to release year-ahead investment outlooks.

Before we launch our Outlook for 2025 next week, we wanted to check in on how the key views contained in our 2024 Mid-Year edition have unfolded. 

Almost six months later: How did we do? 

Take 1: The economy may be stronger than you think.

In June, we thought the economy looked to be at its healthiest in decades, and since then, we have seen just that. Third quarter real growth in the U.S. has remained around 3%, the unemployment rate has held at about 4%, and inflation has continued to fall meaningfully from its 2022 peak. Elsewhere, European growth seems to have bottomed, while global manufacturing is largely turning higher. That said, we would be remiss not to acknowledge some of the bumps along the way, particularly in pockets like the labor market in the U.S., which seem to be in the rearview.

All this to say, we have seen the economy continue to chug along. That is quite a feat against a historically restrictive rate environment. That steady momentum has allowed central bankers to kick off a long-awaited easing cycle. Of the 37 global central banks that we track, 27 are cutting policy rates, including every major central bank besides Japan. We think this gradual and coordinated global effort is set to continue and ultimately drive growth forward from here.

We do see outsized strength in the U.S. from here, though. That is because we believe the Fed is cutting policy rates to extend the current cycle and secure a soft landing. With the election behind us, we also anticipate a Republican majority to deliver largely pro-growth policies. This, in addition to a resilient consumer and robust corporate earnings, has laid a solid foundation for markets to grind higher in the year ahead. 

Take 2: Higher rates will likely have consequences.

Higher rates have not cracked global economies, but they have created pockets of stress. Elevated rates make borrowing expensive for companies and consumers alike. Per macroeconomics 101, that can throw cold water on economic activity by decreasing the propensity to spend across the board (including hiring workers or building a fancy new factory). And while it may be an oversimplification, that relationship keeps prices in check.

As investors, we have instead seen higher rates create opportunity. When it comes to commercial real estate, rate dynamics have created a wide dispersion in commercial real estate prices, and significant variation across sectors and regions. For example, central business district office prices are down 31% year-over-year, but suburban office is down only 4.7% and industrial properties are up 6.5%.

The consequences of higher rates in this case have given nimble investors a rare buying opportunity. Alternative managers have already given the signal: the industry has set aside $400 billion of dry powder for property investment, with about 64% dedicated to U.S. properties -- the highest share in two decades.

Take 3: Do not underestimate AI.

We think that is a fair assessment given that the AI story has developed and evolved more than many thought possible in the second half of the year.

Today, Mag 7 capital spending now exceeds that of the entire energy sector, and we have started to see that feed through to earnings (e.g., Meta’s increased advertising revenues). That means the capex spend from hyperscalers is likely to stay elevated. As productivity boosts become more widespread and infrastructure demand increases, we would expect other sectors to capture that value.

Looking ahead, it is clearer than ever that AI advancement requires the right (read: scalable and efficient) “highways and pipes” to flourish. As such, we see the AI infrastructure build-out as a huge and, importantly, tangible tailwind for the economy. Some Street analysts estimate global AI infrastructure spending to hit $1 trillion by 2028.

As the build out continues, we are more focused than ever on the broad impact it will likely have on productivity, cost saving and revenue generation across industries.

If we assume that half of the vulnerable jobs in the United States are automated away over the next 20 years, then the cumulative productivity gain would be nearly 18%, or $7 trillion beyond the current Congressional Budget Office (CBO) projection for GDP. That is meaningful, and going forward we think developed market GDP growth from AI could be 0.2% per year for the next decade. 

Take 4: The next president will make the deficit worse.

That is still true even as we stand today with the results of the 2024 election in hand. The bottom line? Regardless of who won the election, deficits are set to increase. Now that we know President Trump will be in the Oval Office, we may have a better idea of the degree to which that may happen.

As Michael Cembalest pointed out in his paper, Mind the Gap, President Trump’s policies as stated would increase the deficit by about 4 trillion. But that number is likely to come down given thin margins for Republicans in the House and Senate.

Still markets have spoken. The sharp move in bond yields suggests looser fiscal policy on the horizon. That may also yield better growth prospects and result in a higher landing place for the Fed and higher inflation.

Take 5: Prepare for continued conflict.

Conflict has largely defined much of the geopolitical narrative in the back half of the year. Armed conflicts remain at 80-year highs alongside active wars in the Middle East and Europe. As such, price action (particularly oil and gold) in the past few months has reflected anxieties and uncertainties related to the unpredictable nature of these risks.

We think continued conflict is likely to persist and inevitably evolve, but our advice surrounding how investors can best prepare for it has not. Diversification can help mitigate geopolitical risk for most investors. Furthermore, history tells us that geopolitical events very rarely leave a lasting negative impact on U.S. large-cap equity markets.

What comes next?

With 2024 largely in the rearview, we are excited to share our 2025 Outlook with you in the coming days. In it, we share our insights and top ideas for the year ahead. Spoiler alert: we expect the strength to only build from here.