• Further moderation of consumer and business spending in developed economies is keeping growth well below potential, but a move towards mild recessions cannot be ruled out.
• With strong labor markets, unemployment rates remain relatively low, but cooling wage growth helps to gradually ease core inflationary pressures, allowing central banks to pause.
• China's post-Covid recovery continues in the services sector, but weak business investment continues to weigh on growth, which could be offset by further policy support, not only monetary but also fiscal, to support the real estate sector.
• Without recession, the equity market rally can be sustained, but with more moderate total returns from here.
• Not that there are no risks and we expect more volatility during the second half of the year. Credit is harder to come by; US regional banks are not out of risk yet, although deposit flight has stabilized; inflation has been sticky, especially core; and valuations, especially in the US, leave little room for error. But there are now more arguments too that potential market sell-offs can be seen as buying opportunities.
• While demand is not booming and both profits and margins and both profits and margins have declined slightly from historical highs, this has been less than expected and sales are resilient. sales are resilient. Companies face lower transportation and energy costs, and the struggle to find workers is less frantic. A weaker dollar is a boon for U.S. exporters.
• As a result, market earnings expectations-primarily in the United States and Europe-for the next 12 months have begun to move higher.
• We recommend a more balanced global exposure and overweight ex-US markets, where valuations are more attractive and dividend yields are higher.. In terms of sectors, our strongest convictions are in Technology and Health Care, although we believe that small- and mid-cap companies should also be considered to complement large-cap holdings and diversify with some lagging value cyclicals.
• In fixed income, government bond yields would remain range bound. Overweight IGwhere investment grade credit spreads are holding up well. While HY may continue to outperform, it does not offset the risk in the event of a potential recession.
• The dollar weakens moderately for the rest of the year.
• Finally, adding exposure to certain alternative asset classes, such as infrastructure, could provide a more defensive posture to portfolios, while providing some inflation protection and attractive income.could provide a more defensive posture to portfolios, while providing some inflation protection and attractive income.

What can go wrong?

It all depends on the trajectory of inflation. The main risk scenario we see is one where persistent inflation prevents central banks from delivering support and forces them to have to go even further with interest rates (towards 6% or more in the case of the FED). This would again compress equity valuations, especially US, and cause bonds to fail as diversifiers, as happened in 2022.

You can see more details of the base case and risk scenarios here.

Humberto Mora

Assistant Investment Manager Finance and Business Finance and Business Brokerage Firm