Market IQ | Political and capital market insights

Timely investment outlooks and relevant allocation recommendations

Risk assets continued their ascent in Q3 2024, with strong positive performance across equities, fixed income, and alternatives. Q3 was an especially strong quarter for real assets and fixed income assets. These and other interest rate-sensitive assets rallied behind supportive US inflation and jobs data alongside the anticipation of interest rate cuts from the US Fed, which delivered a 0.5 percent cut to the Federal Funds rate on September 18th. We are now cautious on risky assets and have moved to an underweight to equities and fixed income with an overweight to alternatives. While the Fed has maintained a dovish tone on US interest rates, we see the market’s current interest rate expectations being accompanied by or even requiring a material weakening of the US economic environment. Additionally, we remain cautious of the possible volatility and asset pricing effects of the upcoming 2024 US elections on November 5th, 2024.  

Within equities, we remain underweight in both US large cap and small cap equities as we find US equities valuations demanding following the rally in Q2. While valuations may not currently be the main driver of the market narrative, the S&P 500’s nearly 30x P/E ratio may pose a challenge to momentum once companies begin to release their 2Q24 earnings results. We will remain vigilant, however, because high valuations may soon become more justifiable as treasury yields fall throughout the Fed’s rate cutting cycle and create a more supportive cost of equity environment for stocks. Breadth also remains an issue for US equities, as we see slowing sales and a lack of profitability from non-tech large cap companies.

We enter Q4 2024 with an underweight to our fixed income allocation, but a neutral preference for duration as expressed through a 5s30s stepeener. The Fed looks to be pivoting to a singular focus on unemployment after successfully countering inflation with restrictive monetary policy. As the Fed’s cutting cycle begins, the bond market is pricing in nearly 8 additional cuts before year-end 2025 and a terminal rate of around 3%. We find these expectations demanding and remain wary of a sell-off or flattening in the Treasuries curve should there be a change in Fed signaling or economic trends. We are also allocating to US TIPs from nominal Treasuries to take advantage of attractively low breakevens. Finally, we choose to underweight US high yield credit following an overextended rally in spreads.

We are overweight alternatives with a preference for infrastructure and natural resources over commodities and REITs. With the strong recent performance, we see infrastructure as a suitable defensive selection within real assets. While monetary easing in the US and other developed countries should bring continued interest in real assets, the near-term catalysts following last quarter’s strong rally are now limited. Commodities and natural resources equities also posted strong gains to end Q3 2024. Chinese monetary and fiscal stimulus reinvigorated the demand case for the energy and metals complex. The combination of monetary easing cycles from central banks in the US, China, and Europe makes us positive on the commodities complex in the medium term and beyond.