Q3 2024 investment outlook for advisors

Key Takeaways:

• Resilient growth leads us to overweight equities, but high rates suggest maintaining a bias towards quality companies with strong balance sheets and consistent earnings.
• Our risk-on outlook allows us to feel comfortable with higher yielding bonds, but tight spreads keep us selective.
• Diversification remains important, and we see opportunity to build additional diversification into portfolios via alternative strategies that have maintained low correlations to stocks and bonds.

As we enter the second half of 2024, many of the themes that drove markets in the first half remain the same. Most notably, high interest rates continue to drive dispersion between winners and losers, with large cap quality names outperforming small caps by about 15%.

Large quality continues to outperform small caps
YTD performance through 6/30/24

While economic growth has moderated from last year’s elevated levels, it remains at healthy enough levels to keep us comfortable with our risk-on outlook. It may even be a good thing: slowing growth, in concert with decelerating inflation, may be enough to put a September rate cut back on the table for the Federal Reserve.

Barring any data surprises in the coming months, our base case expectation is for two 25 bp rate cuts from the Fed this year, likely starting in September. While rate cuts should be good for both stocks and bonds, we expect the Fed to take a gradual approach to reducing interest rates, suggesting that rates will remain at relatively high levels for longer. As such, we maintain our preference for stocks over bonds – and quality stocks in particular – as well as a lean into credit and a preference for diversifying alternatives that can capitalize on high cash rates. With borrowing costs expected to remain high, and with diverging impacts on those who have to borrow at high rates and those who are able to earn high rates, we also look towards an active approach to security selection across stocks and bonds.

Investment themes for Q3 2024

We see three key themes driving portfolios in Q3:

• High rates and the AI theme drive dispersion in equities
• High yields and tight spreads suggest an active approach to bonds
• High stock and bond correlations call for more diversification

High rates and the AI theme drive dispersion in equities

Overweight equities, but opt for quality. 

Moderating, but still positive, economic growth continues to support risk-on positioning across stocks and bonds. However, restrictive interest rates continue to weigh on companies with weaker balance sheets and business models, and momentum can shift quickly. As a result, we see the greatest opportunity in mega cap quality, with a tilt towards dynamic approaches and companies within the AI tech stack.

High yields and tight spreads suggest an active approach to bonds

Take advantage of high yields, but be selective in risk taking.

Our positive economic outlook leads us to be more comfortable taking on credit risk, but tight spreads make diversification and selectivity key. We see opportunities to actively position across the curve and across various “plus” sectors, including within private credit.

High stock and bond correlations call for more diversification

Expand diversifiers beyond bonds.

Whether the Fed cuts twice or zero times in 2024, interest rates will still end the year in restrictive territory. These high cash rates should continue to support ‘cash plus’ alternatives, which may be able to deliver idiosyncratic returns above and beyond cash while maintaining low correlations to traditional asset classes.

For more information, read our full Q3 portfolio implementation guide.

Portfolio Implementation Guide

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