2024 midyear outlook: building portfolios for a more volatile macroeconomic backdrop

Market Status & Macroeconomic Outlook

• U.S. equities have reached all-time highs in the first half of 2024, outperforming optimistic expectations, while bonds and cash offer substantial yields.
• Christian Mueller-Glissman asserts that the macro backdrop remains supportive due to solid growth margins, slowing inflation, and anticipated rate cuts, despite the market run-up.
• Alexandra Wilson Elizondo forecasts that the second half of 2024 will be less stable than the first, with a likely increase in market volatility and "unexpected" events driven by geopolitical and political dynamics.

Valuation & Sentiment Analysis

• While S&P 500 valuations appear elevated by historical standards, Mueller-Glissman notes that Return on Equity (ROE) is at 150-year highs, justifying current multiples.
• Sentiment and positioning indicators have recently turned extremely bullish, with risk appetite measures hitting levels not seen since the 1990s, prompting caution regarding near-term summer volatility.
• Late-cycle characteristics are evident in low unemployment (~4%), high profit margins, and compressed risk premiums, though private sector financial health remains "early cycle" due to prior deleveraging.

Artificial Intelligence & Structural Drivers

• The "Magnificent Seven" and AI optimism serve as critical residual drivers for late-cycle equity performance, mitigating typical earnings growth slowdowns.
• Goldman Sachs models a "soft Goldilocks" AI scenario as currently priced into equities, delivering long-term returns in line with historical averages.
• A "super success" AI scenario involving a 150 basis points improvement in productivity growth over the next decade is not yet fully reflected in market valuations.

Election Risks & Policy Shifts

• Upcoming elections in the U.K. and U.S. are viewed as significant catalysts for volatility, with potential for trade wars and fiscal policies that could be inflationary.
• Investors are advised to hedge against political risks through diversification into private markets, illiquid assets, and active management strategies capable of capturing alpha during dislocations.
• Despite potential policy shifts, there is no expectation of a material change in the overall fiscal deficit, though the composition of funding may shift toward more inflationary levers.

Asset Allocation & Hedging Strategy

• The core recommendation remains "risk-on" with a preference for equities over bonds, though bonds are utilized as a necessary buffer for portfolio ballast.
• Hedging costs are currently low, particularly in FX and volatility markets, creating opportunities to protect against specific event risks (e.g., election outcomes) without buying deep out-of-the-money puts.
• Corporate credit is trading at tight spreads post-Global Financial Crisis; mitigating this involves underweighting extra carry in credit markets and rotating into the rate market.

Regional Outlooks

• Europe: Viewed as a value opportunity due to a better cyclical position (ECB cuts) and low valuations, though political volatility (e.g., French elections) may create temporary dislocations to exploit.
• Japan: Recommended for exposure based on structural reforms, government push for real inflation, and corporate governance changes targeting higher ROE, despite short-term BOJ rate policy noise.
• Commodities: Specific commodities like copper are highlighted as undervalued due to expected supply deficits linked to the electric vehicle (EV) revolution.

Long-Term Portfolio Architecture

• Goldman Sachs outlines a robust long-term strategy of a 60/40 portfolio (equities/bonds) over the next 5–10 years, tailored to handle stagflation and high volatility scenarios.
• The equity component is tilted toward growth (including AI, renewable energy, and healthcare), while the fixed income component shifts toward TIPS and duration to capture term premiums.
• Real assets constitute a third pillar to hedge inflation; approximately 20% of this allocation can be effectively re-categorized as equity (e.g., infrastructure, commodity producers) to maintain the 60/40 balance.

Forward-Looking Statements

• The bond market is expected to maintain elevated volatility due to data dependency, with a future expectation of a steeper yield curve as term premia increases.
• Investors are advised to remain agile and monitor momentum data, acknowledging that while late cycles can persist for years, specific "bad news" events could trigger vicious cycles between financial conditions and growth.
• The firm expects disinflation to reassert itself in the second half of the year, creating room for non-recessionary Fed rate cuts.