“Progressively softer labour market conditions and positive inflation developments support gradual rate cuts, allowing the Fed to bring policy rates closer to neutral levels.”
Key investment implications
Current yields are attractive from a historical perspective. US government debt is expected to be the best performer across major countries’ sovereign bonds, with gains for Treasuries that could be the best since 2023.
While valuations are stretched for the S&P500, the equal-weighted S&P500 is not as expensive, further supporting the case for a broadening of the rally. Earnings should continue to grow in the absence of a hard landing.
US cycle forecast
The US economy has undergone an unusual cycle, initiated by the Covid-19 pandemic. The recovery was unique, driven by significant monetary and fiscal measures that boosted activity and tightened the labour market. This was followed by an unexpected inflation surge in 2021-2022, influenced by supply chain disruptions, the war in Europe and substantial domestic policy stimulus (particularly the Inflation Reduction Act – IRA). The risk of inflation becoming entrenched compelled the Federal Reserve (Fed) to raise interest rates aggressively, to a level not seen since the Volcker era of the late 70s.
With this substantial tightening, a mild recession seemed almost inevitable last year, particularly in light of the banking turmoil. The anomalies in this cycle – such as high household wealth, fiscal stimulus and the Fed’s swift response to regional banking issues – limited the crisis’s impact. With targeted support, financial conditions improved and growth resumed. Disinflation also took hold, with inflation rates significantly declining and expectations remaining stable.
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