Unlock Editor’s Digest for free
FT editor Roula Khalaf selects her favourite stories in this weekly newsletter.
Big investors have just wrapped up the mid-year forecasting season, that point in the calendar when they articulate what has gone right and wrong during the year so far and try to make plausible predictions about the next six months, all in the hopes of not looking foolish when 2024 comes to a close.
For me, the most prominent word to emerge from this barrage of analysis is “but.” Market predictions are always riddled with a thick layer of caveats. After all, no one knows the future. Yet even with that in mind, a huge number of analysts and investors were wrong in their judgments six months ago.
It’s July and none of the rate cuts the Fed was supposed to announce have yet materialized, and stocks and other risk assets continue to perform well despite warnings of doom and gloom following the rate hike. The US recession is just around the corner and, it seems, always will be. There’s plenty of humble pie on the menu.
As a result, caution is setting in and investors appear unwilling to make bold bets. Simona Paravani-Mellinghoff, co-head of multi-asset strategies and solutions at BlackRock, described this as a “yes, but” outlook.
“Yes, we have inflation that is coming down from the high single digits, but it is still above the [Fed’s] “The target is 2 percent,” he said at a recent briefing. “Similarly, we expect AI to improve productivity over the medium term, but the timing and extent of that is quite uncertain.” According to his analysis, AI will be disinflationary, but not yet. In fact, it will probably first trigger inflation through inflation. massive amounts Companies will have to make a huge capital outlay to make it work. Even then, it’s pure conjecture what difference exactly it will make to corporate results.
With regret and apologies in advance to the FT’s sub-editors, I must inform you that BlackRock has invented an entirely new word for this collision of major market forces: the potential outcomes are, it says, “polyfurcated.” The financial industry’s determination to invent new and horrible words remains unwavering.
This latest creation was the result of a wide-ranging debate at the world’s largest asset manager about how best to articulate the curious mix of problems playing out in global markets. However, this means that investors must be careful not to become too attached to a particular worldview.
“The reality is that when it comes to building a portfolio, it’s best to do the boring stuff,” Paravani-Mellinghoff said. Diversify, know where your risks are concentrated, be willing to admit when you’re wrong and quickly exit even the most prized positions.
The value of that approach has been proven in the past 10 days, when U.S. economic data showed inflation falling again. Investors have taken that as a signal to pile into smaller companies, which tend to benefit most from lower borrowing costs, while steering clear of the big tech stocks that have dominated returns.
The Russell 2000 index of smaller U.S. stocks rose more than 10 percent in the days after the inflation data was released, while the tech-heavy Nasdaq fell more than 3 percent. Deutsche Bank said it was the biggest turnover between the two indexes since the Russell 2000 was born in 1979.
![Restructured index line chart showing US small caps have outperformed tech stocks since the last inflation update](https://i0.wp.com/www.ft.com/__origami/service/image/v2/images/raw/https%3A%2F%2Fd6c748xw2pzm8.cloudfront.net%2Fprod%2F7c51e370-45c5-11ef-a72d-2de650996b65-standard.png?resize=1200%2C857&ssl=1)
The speed of this shift is a reminder of how quickly a supposedly stable market dynamic can change. It is no wonder, then, that the big issues of the day attract such divergent opinions.
In its latest survey of fund managers, for example, Bank of America found that 43% of investors believe AI stocks are in a bubble. At the same time, however, an almost exactly equal proportion believe this is not the case. Goldman Sachs also notes that “skepticism abounds among investors” about how the technology will be adopted and monetized.
A survey by Absolute Strategy Research highlighted the differences in investor narratives. Those with an optimistic disposition on stocks are in the “we trust AI” camp, while those who prefer slower, steadier behavior favor value stocks such as commodities. Still, a fifth of respondents expect a recession, and only 13% are worried about inflation and overheating. Interestingly, even those who believe inflation will rise again still expect bond yields to fall, a reversal of the usual relationship.
Putting all this together, investors are generally unwilling to fight the broader stock market, which continues to rise. But, as ASR says, “optimism remains moderate.”
So, not for the first time this year, we find ourselves in an awkward situation where stock markets are in party mode (the US benchmark S&P 500 index has risen for 28 of the past 37 weeks according to Deutsche Bank’s number-crunchers, making this the longest such streak since 1989), but investors are much more cautious. We are late in the economic and market cycle, and everyone knows that risk assets are “fragile,” as Morgan Stanley has put it. That is not in itself a good enough reason for investors to run for the hills. But the easy part of the year is clearly behind us.