Money Managers Optimistic About U.S. Economy, Inflation, Interest Rates and More

Rhea-AI Summary

Franklin Templeton Institute's latest Global Investment Management Survey reveals increased optimism among professional investors regarding the U.S. economy, citing a strong stock market, declining inflation, low unemployment, and strong corporate balance sheets.

The survey, conducted in May, involved over 250 senior investment professionals from various global teams. Key findings include expectations of 2.3% GDP growth in 2024, stable inflation at around 2.9%, and low unemployment rates. The Federal Reserve is expected to make one or two interest rate cuts instead of four as previously predicted.

Internationally, respondents are more positive about Europe's economic growth and predict that India, Japan, and China will outperform the U.S. equity market in 2024.

Despite the positive outlook, respondents note that the S&P 500 Index is considered expensive with upside. Favored sectors include technology, industrials, energy, health care, and financials. Fixed income investments are expected to hinge on Fed policies and geopolitical factors. Alternative investments like private equity and real estate debt also remain attractive.

Positive

• U.S. GDP growth expected to improve to 2.3% in 2024 from 1.6% in January's survey.
• U.S. inflation predicted to stabilize around 2.9%, aligning closely with current levels.
• U.S. unemployment projected to remain historically low, increasing slightly from 4.0% to 4.1%.
• Federal Reserve expected to reduce interest rates only once or twice, instead of four times as previously anticipated.
• Respondents are more optimistic about Europe's GDP growth, forecasting 1.2% in 2024 compared to 0.6% in January.
• India, Japan, and China expected to outperform the U.S. equity market in 2024.
• High yield default rates are expected to remain lower than historical averages, between 2% and 4%.
• Investment grade debt favored due to higher credit quality and attractive risk-adjusted returns.

Negative

• Earnings growth in the U.S. is expected to be 7.4%, lower than the FactSet consensus prediction of 10.4%.
• 66% of respondents anticipate increased volatility in the U.S. equity market.
• The S&P 500 Index is considered expensive with no further upside expected.
• High yield defaults started the year at 2.5%, with expectations to rise towards historical averages of 3.5%.
• U.S. Treasury rate expected to be between 4.00% and 4.50% by the end of 2024, potentially impacting fixed income returns.

Insights

Financial Analyst

The recent survey from Franklin Templeton Institute captures a positive sentiment among investment professionals regarding the U.S. economy. This optimism is underpinned by strong stock market performance, declining inflation and steady unemployment rates. The revised GDP growth expectation of 2.3% for 2024, up from 1.6% predicted earlier, illustrates the improved outlook. Yet, it’s important for investors to consider that the higher earnings growth forecast of 7.4% for U.S. equities still lags behind the FactSet consensus of 10.4%. This indicates potential market overvaluation, as noted by the survey predicting no upside for the S&P 500 Index. Investors should exercise caution, especially with the anticipated increase in market volatility and weigh the risks against the expected earnings growth.

Market Research Analyst

Interestingly, the survey indicates a shift in preference towards U.S. large cap stocks over small caps due to factors like free cash flow yield and return on invested capital. This pivot could signify a strategic move by investors seeking stability amid the anticipated market turbulence. Moreover, the favored sectors—technology, industrials, energy, health care and financials—suggest a focus on industries with robust growth potential and defensive characteristics. For retail investors, it’s important to align their portfolios with these insights while maintaining a diversified approach to mitigate risks.

Fixed Income Analyst

The fixed income outlook hinges significantly on the U.S. Federal Reserve’s monetary policy. The expectation of the 10-year U.S. Treasury rate to settle between 4.00% and 4.50% by the end of 2024 reflects a moderate stance. Given the potential for higher defaults in high yield bonds, the preference for investment grade debt seems logical, providing a safer bet with lower default rates. Additionally, the attractiveness of municipal bonds as a high-quality, tax-free investment option cannot be overstated for investors seeking stability and tax efficiency in their fixed income portfolios.

Franklin Templeton Institute’s Global Investment Management Survey provides insights on the economy, equities, fixed income and alternative investments

SAN MATEO, Calif.--(BUSINESS WIRE)-- Professional investors are more optimistic about the U.S. economy than they were at the beginning of the year due to the strong stock market, declining inflation, steady unemployment figures and solid corporate balance sheets, according to the latest Global Investment Management Survey by the Franklin Templeton Institute.

The results of the latest survey, which was conducted in May, encompass the views of more than 250 of Franklin Templeton’s senior investment professionals from different teams around the world with unique knowledge, processes and perspectives. The respondents span the breadth of Franklin Templeton, covering public and private equity, public and private debt, real estate, digital assets, hedge funds and secondary private market investments. The Franklin Templeton Institute’s inaugural Global Investment Management Survey was conducted in January 2024.

“When we first conducted this survey in January, we said a global recession should be avoided,” said Stephen Dover, Chief Market Strategist and Head of the Franklin Templeton Institute. “Today’s economy is better than it was at the beginning of the year. In fact, we’re now expecting just one or two interest rate cuts from the U.S. Federal Reserve rather than the four we’d predicted six months ago.”

Based on the survey’s results, other positive signs include the following:

• Respondents are more positive about U.S. economic growth in the second half of the year than they were in January. They expect 2.3% gross domestic product (GDP) growth in 2024, on average, compared to expectations of 1.6% growth in January’s survey.
• U.S. unemployment is expected to remain historically low despite a projected increase from 4.0% to 4.1%.
• Inflation, as measured by U.S. Core Personal Consumption Expenditures (PCE), is expected to stabilize and finish the year around 2.9%, essentially in line with the current reading of 2.8%.
• Most survey respondents expect the federal funds rate to end the year between 4.75% and 5.25%.

The story outside the U.S. is mixed:

• Survey respondents are more positive on Europe’s economic growth than they were six months ago, expecting 1.2% GDP growth in 2024, on average, compared to their expectation of 0.6% GDP growth in January 2024.
• The stock markets in India, Japan and China are expected to outperform the U.S. equity market in 2024. Japan, in particular, is favored by 33% of respondents due to structural and corporate governance reforms.
• The majority of respondents expect 3% to 5% growth in China’s GDP.
• When it comes to the future performance of equities, respondents favor developed market stocks over emerging market stocks given improving fundamentals in Europe and Japan. India is one exception as its economic transformation continues.

“It’s certainly good news that the economy and corporate earnings have been stronger than expected in the first half of this year,” Dover added. “The downside is that we believe there’s no more upside for the S&P 500 Index now. In other words, the stock market is expensive.”

The complete survey results can be found here.

Additional predictions from survey’s focus areas

Equities likely to be flat in 2024

• Earnings are expected to grow at 7.4% in the U.S. versus the FactSet consensus prediction of 10.4%.
• The S&P 500 Index is expected to hit 5250 before the end of this year. At the same time, almost 66% of respondents anticipate more volatility in the U.S. equity market.
• The fundamental drivers of the S&P 500 are positive earnings estimate revisions, stable / stronger U.S. real GDP, lower U.S. 10-year note yields and multiple compression.
• Although small cap stocks were favored in January, sentiment has shifted. This time around, U.S. growth and U.S. large cap stocks are favored due to their free cash flow yield, return on invested capital and return on equity.
• Favored sectors include technology, industrials, energy, health care and financials.

Fixed income hinges on Fed policy, geopolitics, lower corporate earnings

• Nearly two-thirds (63%) of respondents expect the 10-year U.S. Treasury rate to be between 4.00% and 4.50% at the end of 2024. The reading at the end of May was 4.61%.
• Investment grade bond spreads over U.S. Treasuries with similar maturity profiles are expected to be between 90 and 100 basis points (bps) at the end of 2024 compared to the current reading of 85 bps.
• High yield spreads are expected to be between 325 and 375 bps compared to the current reading of 308 bps.
• High yield defaults started the year at 2.5% – much lower than the historical default rate of 3.5%. Most respondents expect the rate to end 2024 between 2% and 4%.
• Due to its higher credit quality, investment grade debt is favored as default rates for high yield bonds are likely to tick upward toward their historical average.
• Municipal bonds should continue to be a high-quality, diversifying investment option with attractive tax-free yields.

Alternatives: Private equity secondaries are attractive

• Secondary investments continue to look attractive given the stalled exits in private equity as well as institutions’ need for liquidity.
• Seasoned private credit managers are expected to help fill the void created by the pullback of traditional lenders.
• Real estate debt appears to be a good option given historically attractive risk-adjusted returns. The office sector should continue to be under duress, but there are opportunities in industrials, multifamily housing and life sciences.

There is no assurance that any estimate, forecast or projection will be realized.

About the survey

The survey provides a comprehensive summation of the views of more than 250 of Franklin Templeton’s investment professionals who focus on both public and private markets across asset classes. The specific forecasts within the survey reflect the average of the group; each investment team operates independently and has its own views.

First conducted in January 2024, the survey is a starting point for Franklin Templeton clients, including financial advisors and institutional investors, to understand the firm’s views on the economy, equities, fixed income and alternatives. For an overview of the January survey, click here.

The Franklin Templeton Institute, launched in January 2021, is an innovative hub for research and knowledge sharing that unlocks the firm’s competitive advantage as a source of global market insights.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of the publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

About Franklin Templeton

Franklin Resources, Inc. [NYSE:BEN] is a global investment management organization with subsidiaries operating as Franklin Templeton and serving clients in over 150 countries. Franklin Templeton’s mission is to help clients achieve better outcomes through investment management expertise, wealth management and technology solutions. Through its specialist investment managers, the company offers specialization on a global scale, bringing extensive capabilities in fixed income, equity, alternatives and multi-asset solutions. With more than 1,500 investment professionals, and offices in major financial markets around the world, the California-based company has over 75 years of investment experience and over $1.6 trillion in assets under management as of May 31, 2024. For more information, please visit franklintempleton.com and follow us on LinkedIn, X and Facebook.

Copyright © 2024. Franklin Templeton. All rights reserved.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240612862574/en/

Franklin Templeton Corporate Communications:

Lisa Tibbitts, +1 (904) 942-4451, lisa.tibbitts@franklintempleton.com

Source: Franklin Templeton

FAQ

What is the expected U.S. GDP growth for 2024 according to Franklin Templeton Institute?

The expected U.S. GDP growth for 2024 is 2.3%.

How many interest rate cuts does Franklin Templeton Institute predict from the Federal Reserve?

Franklin Templeton Institute predicts one or two interest rate cuts from the Federal Reserve.

What is the forecasted U.S. inflation rate for 2024?

The forecasted U.S. inflation rate for 2024 is around 2.9%.

What sectors are favored by respondents in the Franklin Templeton survey?

Favored sectors include technology, industrials, energy, health care, and financials.

How is the S&P 500 Index perceived according to the Franklin Templeton survey?

The S&P 500 Index is perceived as expensive with no further upside expected.

What is the expected U.S. unemployment rate for 2024?

The expected U.S. unemployment rate for 2024 is around 4.1%.

Which international markets are expected to outperform the U.S. equity market in 2024?

India, Japan, and China are expected to outperform the U.S. equity market in 2024.

What is the expected Federal funds rate range by the end of 2024?

The Federal funds rate is expected to range between 4.75% and 5.25% by the end of 2024.

What is the expected U.S. Treasury rate by the end of 2024?

The expected U.S. Treasury rate is between 4.00% and 4.50% by the end of 2024.

What is the expected high yield default rate for 2024?

The expected high yield default rate for 2024 is between 2% and 4%.