Issue link: https://info.seic.com/i/1513994
© 2024 SEI ® 2 Outlook: A healthy dose of skepticism In many ways, we begin 2024 the same way we began 2023…with skepticism. Oh, let us count the ways! We remain skeptical that: • Inflation will return to target levels, or below, in a sustainable way. • Central banks will meaningfully cut interest rates in 2024—and even more skeptical that they will start cutting in March. • Earnings will support lofty valuations, particularly with the largest of the large-capitalization stocks. Much of our skepticism is a reaction to what appears to be the extreme confidence of the market itself: • Equities are not just expected to deliver earnings growth in 2024 but double digit earnings growth. • The Fed is expected to not just cut interest rates but to double the level of cuts projected by the policy makers themselves. • Even more interesting is that these two scenarios are priced in simultaneously, which suggests the central bank will carry out multiple "normalization cuts" in reaction to falling inflation as opposed to "stimulus cuts" in reaction to a slowing economy. Unrealistic expectations The U.S. Fed is projecting three 25-basis point reductions. Traders in the futures market are pricing in six cuts (1.50%) in the federal funds rate by the end of 2024, as shown below. Market expectations for Federal Reserve policy action (cumulative) 2024 OIS Curve, Source: Bloomberg Somehow the "soft landing" label doesn't quite capture the market's expectations for 2024, which appears closer to perfection. Essentially, we are taking the other side of the perfection trade. We expect to see rate cuts more in line with the Fed's projection than the market's expectations. The equity rally into year-end may have legs into early 2024; however, we are more focused on diversity than directionality. The well documented outperformance of the "Magnificent 7" tech stocks relative to the broader market in 2023 failed to reappear in the fourth quarter even as interest rates declined. We see that trend continuing in 2024, as tech stock multiples look rich and vulnerable. Accordingly, we prefer a more diversified posture across equity exposure, including individual stocks, sectors and geographies. The factor view: Quality, momentum, and value Our core approach of favoring high quality companies with positive earnings momentum at reasonable values remains intact. We expect to emphasize value a bit more in 2024 based on historically wide spreads (the relative attractiveness of stocks representing high and low measures of value) and what we see as a supportive macro environment for the coming year. This includes our expectations for a market-disappointing number of developed market Central Bank rate cuts and elevated stock valuations, which can cause even strong earnings to disappoint market participants. Our factor exposures and manager stock selection currently leaves our portfolios leaning into financials and materials (given our preference for value), consumer discretionary (given our momentum and quality exposures), and consumer staples (from our low-volatility positioning). -1.80 -1.60 -1.40 -1.20 -1.00 -0.80 -0.60 -0.40 -0.20 0.00 1/31/2024 3/20/2024 5/1/2024 6/12/2024 7/31/2024 9/18/2024 11/7/2024 12/18/2024 Fed meeting dates Percentage (%)