The intense economic headwind from high interest rates is fading and relief is on the way as reduced inflation pressures have paved the way for central banks to loosen monetary conditions. Against this backdrop of falling rates, we think the economy is likely to achieve a soft landing where economic growth is sufficient to lift corporate profits and stock prices. High valuations in mega-cap technology stocks, in particular, could limit return potential.
Economy
The global economy continues to decelerate and, while a mild recession is possible given deterioration in labour markets, we think the most likely scenario is that economies continue to expand over our forecast horizon.
Our base case is one where world economies grow at a modest pace over the next few quarters, accelerating slightly into 2025 helped by the lagged benefit of interest-rate cuts.
Our benign outlook is subject to a variety of risks, and the key sources of uncertainty include geopolitical tensions in the Middle East, Ukraine and China, as well as the U.S. election in November.
RBC GAM GDP forecast for developed markets
Note: As of August 9, 2024. Source: RBC GAM
Fixed Income
In the context of our forecast for modest economic growth and cooling inflation, it is reasonable to expect steady global monetary easing over the remainder of 2024 and into 2025.
With the U.S. 10-year yield falling below 4% in August to its lowest level in the past year, we think that sovereign bonds are now reasonably priced.
Our models suggest there is scope for yields to continue falling, but only slightly so over the medium to longer term.
Returns in sovereign bonds are likely to moderate to the mid to low single digits over the next 12 months in the U.S. and probably less in regions outside the U.S.
U.S. 10-year T-bond yield Equilibrium range
Note: As of August 31, 2024. Source: RBC GAM
Equity Markets
Mega-cap technology stocks have greatly benefited from optimism regarding the productivity improvements that artificial intelligence could bring, but the enthusiasm for these stocks may be getting tested.
Should the economy experience a soft landing, appealing opportunities exist in sectors that haven’t fully participated in global stock gains since the start of the year, such as in small caps, international equities and value stocks, where gains have accelerated since July.
Overall, we look for equities to deliver mid to high single-digit returns over the year ahead, and we favour segments of the market where valuations are less demanding.
Global stock-market composite Equity-market indexes relative to equilibrium
Note: As of August 31, 2024. Source: RBC GAM