Key takeaways
- Strong growth should support U.S. equity markets, but higher-for-longer interest rate policy leads us to prefer quality stocks with strong balance sheets and resilient business models.
- Our positive economic outlook leads us to be more comfortable taking on credit risk, but tight credit spreads make selectivity key.
- Elevated stock/bond correlations make additional sources of diversification key.
As we begin the second quarter, many of the trades that worked in 2023 continue to work: large cap quality U.S. stocks have led the way, and excitement over artificial intelligence technology has driven outsized returns in select names. Growth expectations continue to get revised upward, with the Federal Reserve upgrading its 2024 GDP growth forecast from 1.4% to 2.1% in its March update.
The flip side is that inflation has remained sticky, calling into question when the Federal Reserve will be able to start easing interest rates. While the FOMC suggested three rate cuts in 2024 in its March Statement of Economic Projections, recent statements from Fed officials suggest that cuts may be slower to arrive and shallower than previously anticipated.
Our view is that we are still likely to get at least one rate cut this year, and that this environment remains supportive of risk assets… but that restrictive interest rates warrant selectivity when approaching stock selection, curve positioning, and credit exposure.
Investment themes for Q2 2024
We see three key themes driving portfolios in Q2:
- Overweight equities and opt for quality
- Take advantage of high yield, but be selective in risk taking
- Expand diversifiers beyond bonds
Overweight equities and opt for quality stocks
A healthy U.S economy and better-than-expected growth continue 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. As a result, we prefer high quality names, and see value in taking an active approach to security selection and factor timing.
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 selectivity key. We see opportunities to actively position across the curve and across various “plus” credit sectors, including within private credit.
Expand diversifiers beyond bonds
Interest rates are unlikely to fall dramatically in the near term. We thus seek additional diversification with potentially higher returns via alternatives strategies. As a bonus, many may capitalize on high cash rates in addition to the portfolio alpha they seek to deliver.
For more information, read our full Q2 portfolio implementation guide.
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