Weekly Market Update

We’ve revised our real GDP estimate for the US in 2024 from +1.6% to +2.0%. For 2025, the estimate was reduced from +2.6% to +2.4%. Our global GDP estimate was also raised from 2.2% to 2.3% this year and cut from 2.8% to 2.7% in 2025.

This indicates that growth has been pulled forward so much that our “Slow then Grow” thesis looks more like “Grow then Grow” now, with little softness in US economy from higher rates, at least for now.

In our Wealth Outlook 2024, we identified “hidden recessions” in the US in real estate, manufacturing and health care, as well as in cyclical parts of the world economy.

We thought the economy would bottom early in 2024 and rebound over the coming 18 months. Recent data suggest earlier improvements than we anticipated.

This has portfolio implications from interest rates to equity selection across regions. Investors have already begun to price in the cyclical recovery we see unfolding, but as with so much of this post-pandemic period, this is not a typical cyclical rebound.

While sectors tied to manufacturing and housing have surged, some normally high-beta segments, such as banks, remain in the doldrums. This asynchronous recovery has allowed us to identify healthcare technology and mid-cap growth shares as undiscounted opportunities.

From January 1, 2023 to the present, the S&P 500 and Nasdaq are up 33.8% and 55.5%. In 2024 year-to-date, they are up 7.7% and 8.4% respectively.

How is this possible? The short answer is earnings growth. We’ve raised S&P 500 EPS estimates, expecting a gain near 8% in 2024 (vs 5% previously) and +6% in 2025. Such would be new record highs for US profits.

In particular, we believe corporate profit estimates for 1Q 2024 may be too low.

With inflation moderating almost everywhere and employment remaining stronger than expected, real income gains are sustaining consumer spending and real returns on bonds and cash are contributing to better personal income.

After what investors endured in 2022, this recovery could hardly be better for investors. This has been a close historical relationship between manufacturing sentiment and outperformance of Industrials versus defensive sectors like Consumer Staples.

Performance over the past 12 months suggests that Industrials are already priced for a fuller cyclical recovery. Homebuilders, another highly cyclical group of stocks, have surged since mid-2022 despite a doubling in mortgage rates.

Structural demand for housing, coupled with a shortage of supply and easing of cost pressures, have led to a de-coupling of the typical relationship between home builders and interest rates. Home builders have done much better than one would have expected.

Where does this leave us? Some cyclicals are already priced (or overpriced) for a stronger-than-expected macro environment. Others face ongoing property-related risks in the US and China. With growth headed higher, we can’t count on a big bond rally bailing out the market’s most rate-sensitive sectors.

One place we see real value is health care.

We see Health Care as major beneficiary of low expectations and improving conditions. Within this diverse sector there is defensive value in large cap pharma and highly speculative growth in small cap biotech.

Straddling these two extremes are medical devices and life sciences tools companies, who focus on the equipment and tools needed to operate a hospital or undergo a drug trial.

We now view health care innovation to be attractively valued. Various healthcare groups seemed poised to recover. Healthcare equipment and supplies, an industry with high current profits, fell sharply in 2023 with shares 15% below their late 2021 peak.