Economic data has been resilient, recession risks have diminished, and inflation has cooled sufficiently for central banks to consider cutting policy rates at some point this year. In this environment, sovereign bonds are appealing, and while stocks have surged as investors embraced the improved odds of an economic soft landing, demanding valuations in U.S. large-cap stocks may limit upside potential.
Economy
We upgraded the likelihood of a soft landing for the U.S. economy to 60% from 40% last quarter, and now look for modest growth in the first half of 2024 instead of recession.
Our 2024 growth forecasts are now roughly in line with the consensus for most countries, and even slightly above for the U.S. and Canada.
Although the soft-landing scenario is now the most probable outcome, we recognize that a recession remains possible given that higher rates represent an economic headwind, mostly affecting regions outside of the U.S., and several important recession signals remain in place.
RBC GAM GDP forecast for developed markets
Note: As of February 23, 2024. Source: RBC GAM
Fixed Income
Bonds are near their most attractive levels in two decades after selling off from a state of overvaluation that had not been seen in 150 years.
Our models indicate that the appropriate level for bond yields is lower if inflation continues to fall as we expect. A variety of bullish technical measures also suggest a solid outlook for bonds.
Our own forecast is for a 4.00% yield on the U.S. 10-year bond a year from now, which would result in mid-to high single-digit returns over the year ahead and, importantly, with little valuation risk.
U.S. 10-year T-Bond yield Equilibrium range
Note: As of February 29, 2024. Source: RBC GAM
Equity Markets
Global equities have enjoyed a powerful rally in the past quarter, with many major markets reaching record highs. Most of the recent gains, however, have been delivered by a narrow set of mega-cap technology stocks.
The “Magnificent 7” are benefiting from trends in artificial intelligence and are not necessarily overpriced as long as their earnings can continue to grow at a fast pace.
Given more moderate returns, most major equity markets outside of the U.S. are trading at attractive levels relative to our modelled fair value.
Elevated valuations in U.S. large-cap stocks in general means that achieving decent returns on the S&P 500 will now require solid earnings growth and heightened investor confidence be sustained.
Major indices’ price change in USD 2023 and YTD 2024
Note: As of February 29, 2024. Magnificent 7 includes Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla. Source: Bloomberg, RBC GAM