• Further restraint in consumer and business spending in developed economies is keeping growth well below potential, and it cannot be ruled out that they may be heading toward mild recessions. 
• With strong labor markets, unemployment rates remain relatively low, but the slowdown in wage growth is helping 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 greater policy support—not only monetary but also fiscal—to bolster the real estate sector.
• Without a recession, the stock market rally can continue, but with more moderate total returns from here on out. 
• It’s not that there are no risks, and we expect more volatility in the second half of the year. Credit is harder to come by; U.S. regional banks are not out of the woods yet, even though the deposit outflow has stabilized; inflation has been sticky, especially core inflation; and valuations, especially in the U.S., leave little room for error. But there are now also more reasons to view potential market sell-offs as buying opportunities.
• Although demand is not booming and both profits and margins have declined slightly from all-time highs, the decline has been less than expected, and sales remain resilient. Companies are facing lower transportation and energy costs, and the struggle to find workers is less intense. A weaker dollar is a big help to U.S. exporters.
• As a result, market earnings expectations—primarily in the United States and Europe—for the next 12 months have begun to rise.
• We recommend a more balanced global allocation and overweighting non-U.S. 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 to diversify with some lagging cyclical value stocks.
• In the fixed-income market, government bond yields are expected to remain within a range. Overweight investment-grade (IG), where investment-grade credit spreads remain healthy. While high-yield (HY) may continue to outperform, it does not justify the risk in the event of a potential recession.
• The dollar will weaken moderately for the rest of the year.
• Finally, adding exposure to certain alternative asset classes, such as infrastructure, could give portfolios a more defensive stance, while also providing some protection against inflation and attractive returns.

What could go wrong?

It all depends on the trajectory of inflation. The main risk scenario we see is one in which persistent inflation prevents central banks from providing support and forces them to raise interest rates even further (toward 6% or higher in the case of the Fed). This would once again put downward pressure on equity valuations—especially in the U.S.—and cause bonds to fail as diversifiers, just as happened in 2022.

You can find more details about the base case and the risk scenarios here.

Humberto Mora

Investment, Finance, and Business Manager; Stockbroker