Fourth quarter economic outlook

Hello, I'm Vivian Estadt, Client Service Director at SEI. I'm here with Chief Market Strategist and Senior Portfolio Manager Jim Solloway, who will be presenting our economic outlook for 2024. This time last year, investor sentiment was quite subdued following a year of sharp declines in stock and bond prices. Investors are much more optimistic following the stellar performance of global equities and a reversal in bond markets. Jim, what are your feelings about financial markets as we head into 2024?

Thanks, Vivian. Investor sentiment is certainly enthusiastic. This is no doubt driven in part by the performance of the magnificent seven US mega-cap technology stocks that are almost single-handedly responsible for global stock market performance this year. However, in our view, those stocks look expensive, as some kind of pullback in 2024 would not be surprising. The chart on the screen tracks the valuations of large-cap stocks, US technology sector, and international stocks. While US large-cap and technology stocks saw some price correction in 2022, valuations remain elevated and are based on earnings estimates that we believe are probably too optimistic.

Given those valuations and earnings expectations, is there somewhere else that looks more attractive to you?

Yes, I believe there may be better opportunities in 2024 in a variety of other asset classes, including small-cap and international stocks.

What trends are you watching for this year?

The extent of any changes in the current trajectory of stock and bond markets will depend on perceptions about economic growth, the corporate profits outlook, the path of inflation, and central bank responses. Take corporate profits, for example. We believe that profit margins are likely to come under pressure, as previous secular tailwinds turn into headwinds. Since unemployment remains low, companies will continue to face upward wage pressures. As lower debt matures, companies will need to finance operations with more expensive debt. Efforts to diversify supply chains away from China will temporarily reduce productivity. We also expect governments will seek to repair their fiscal positions through higher corporate taxes, while also pushing companies to adopt environmentally conscious practices aimed at reducing the use of fossil fuels. Economy-wide profits have already declined from the peak levels reached in 2021 and lately have been in the same range as in the five-year period between 2010 and 2015, a time when the economy was struggling to grow out of the global financial crisis.

It sounds as though you are not as bullish as the general consensus. Would you go as far as to say you're entering 2024 as a bear?

I say I'm cautious. With animal spirits running high, it would not be surprising to see this bull market stumble early in 2024. However, there are many cross-currents that make it difficult to forecast the path of financial assets through the year. A weaker than expected economy would likely undercut investors' optimistic earnings growth assumptions. It also could lead to a more aggressive monetary policy easing by the US Federal Reserve. However, a big decline in interest rates already seems to be largely discounted by the markets. It's our view though that the US economy will not fall off a cliff in the next six months. If it surprises on the upside however, central banks might not be able to cut interest rates as much as markets are expecting and bond yields are not likely to fall much. That would be a problem for stocks but it also would likely be a problem for bonds. More than ever, we believe that broad diversification across styles and asset classes is the best way to hedge against the uncertain outcomes facing investors in 2024.

Thanks, Jim. We always appreciate your insights. SEI is focused on the major issues that are of interest to our clients. We incorporate these discussions into our advisory process as the impact varies based on each client's goals. For more of SEI's insights, read our latest economic outlook available on our website.