Jacob Manoukian

U.S. Head of Investment Strategy

About six weeks into the new year, and the investment narrative has already started to take shape. Many investors seem to believe that the Federal Reserve and other global central banks will start to lower interest rates, but they remain on edge about the possibility that geopolitical tensions, supply chain disruptions and strong growth data might cause a fresh surge in inflation that disrupts those plans. We’re watching all of those developments, as the start of the year doesn’t always set the tone for what follows.

Within equity markets, the technology and health care sectors are two of the best performing sectors globally. And in the corporate sphere, merger and acquisition (M&A) activity is already doubling last year’s pace.

So which trends are here to stay?

Inflation worries should continue to fade

Here's the good news: we think the inflation worries that have marked the first few weeks of 2024 will continue to fade away. That might not be obvious from the news, as inflation expectations embedded in the bond market are at the highest level since October. December’s Consumer Price Index (CPI) report showed larger price increases than economists expected. Meanwhile, supply chain disruptions due to conflict in the Red Sea (and, to a lesser extent, water levels in the Panama Canal) have sent shipping costs soaring. Freight rates from Shanghai to Los Angeles have doubled since December.

But we are watching the bigger picture. For one, shipping costs are still 70% lower than their COVID-era peaks, and imported goods only make up 10% of U.S. consumer spending. That means higher import costs have a muted effect on the prices in the U.S.

Shipping costs have spiked, but are well off pandemic-era highs

World container index, U.S. Dollars in thousands per 40 foot container

Line chart showing shipping costs from 2012 to 2024.

More importantly, we believe that there is still more disinflation to come from both shelter prices and the labor market. The Federal Reserve’s index for real-time rent is plunging at its fastest pace on record. Further, labor markets have normalized. The Labor Department’s quits rate and job openings metrics, which measure both labor demand and wage pressure, are more or less at their pre-pandemic levels.

Putting it all together, we believe that the worries about an inflation resurgence are misplaced, at least for 2024.

Health care and tech are poised for success

The technology and health care sectors are rallying, and we expected that trend to continue. For both, it all comes down to earnings, and long-term trends appear supportive. Last year, the health care sector posted its first year on record of negative earnings growth because of the surge in COVID-19 related spending that had dramatically expanded their profits in 2021 and 2022 came to an end.

While analysts expect two more quarters of negative growth for the sector, it seems the worst is over, and we would rather focus on the potential inflection point.

Tech and health care are both emerging from their earnings recessions

Quarterly earnings per share growth, year-over- year, percentage

Bar chart showing quarterly earnings per share growth, year-over- year in percentages.

The still nascent expansion of GLP-1 weight loss drugs can potentially drive upside for health care. An increase in M&A activity and continued drug innovation could present additional tailwinds.

Technology has already emerged from its own earnings recession, and we expect the sector to generate mid-teens earnings growth through 2025. The global artificial intelligence (AI) trend will be a major factor here, and the two largest tech stocks by market cap are leaders in AI. Nvidia, which makes the chips that power AI, and Microsoft, which may possess the clearest vision of how to integrate AI with existing products to drive pricing power, make up over one third of the S&P 500 technology sector.

M&A wave is here to stay

Another trend that we expect to continue is increased merger and acquisition activity. With less macroeconomic uncertainty, lower interest rates and higher equity valuations, management teams appear to be more comfortable making deals. The year-to-date total of nearly $180 billion in announced deals as of January 25, 2024 is almost double last year’s pace.

Notable deals include the $33 billion software tie-up between Synopsys and ANSYS, BlackRock’s purchase of Global Infrastructure Management, and Sekisui House’s acquisition of MDC Holdings, which will create the fifth largest homebuilder in the U.S. More M&A activity could also be a positive for private equity managers and owners of closely held businesses that have had a hard time monetizing investments over the past few years.

No matter which trends fade and which ones endure, we think that the macroeconomic backdrop of stable inflation, declining policy rates, and solid corporate earnings growth paints a constructive backdrop for multi-asset portfolios.

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