A pause in momentum

Summary

Economic growth continues to disappoint in the UK, Europe and China. Even in the US, the outlook has become more nuanced over the past month with further signs of a slowdown. Inflation remains too high for comfort, but Central Banks appear willing to pause before deciding to shift interest rates further.

Oil prices have risen sharply in the past 3 months as Russian and Saudi Arabian cutbacks take effect. This may prolong the inflationary pressure on the real economy and/or result in weaker real economic growth as consumers struggle to cope with higher costs.

Downward pressure on Sterling could be expected to continue in the face of weakness in the economy and the Bank of England holding off from pushing interest rates higher despite inflation remaining above their inflation target.

Expectations around corporate profits growth have stabilised over the past month. This is a stark change of momentum compared to the end of 2022. This change in earnings momentum has been driven by the large technology companies.

Scenario review

The use of scenarios allows investors to think about the future in a more flexible manner, taking into account conflicting data, without being wedded to one particular view or forecast. Through much of 2023, the market has appeared to move towards a Goldilocks outcome, but there is some evidence that growth may disappoint in 2024. Whether this migrates into a full blown recession will be key.

Scenario	Economy	Investment consequences
Inflation peaks and economic growth recovers (Goldilocks)	Inflation peaked in late 2022 even though the US economy remains resilient. The Federal Reserve (Fed) eases back on the pace of interest rate tightening.	Normalisation of market sentiment with earnings remaining linked to revenue growth of the overall economy.
Sticky inflation prevents Fed easing in 2023.	Inflation proves sticky with better economic growth (services and jobs). Fed moves to tighten aggressively and shifts the pivot from 2023 expectations to cut rates.	Derating of equities continue. Earnings Per Share cuts accelerate. Bonds struggle as rates remain higher for longer. Risk-off i.e. a sell off of equities (a repeat of early 2022).
Recession	The current slowdown in economic growth escalates and, led by the US housing market, the US enters a recession in late 2023 early 2024. Inflation eases back but unemployment increases in the US, resulting in a drop in aggregate demand in the economy.	Earnings downgrades outweigh any decline in bond yields. Risk appetite falls back towards lows. Equity markets fall and bonds rise.

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