Economies have demonstrated resilience in the face of restrictive monetary conditions and inflation has now cooled sufficiently to prompt central-bank rate cuts. Investors have embraced this favourable backdrop, with stocks climbing to record levels. Valuations, however, are at a point where further gains are becoming increasingly dependent on lofty expectations being achieved and heightened investor confidence being sustained.
Economy
The global economy has managed to withstand higher interest rates and continue to grow, reinforcing our view that a recession can be avoided over the year ahead. We place the odds at 65% that economies manage a soft landing, with potentially two to five years of further expansion.
We forecast annualized growth rates of just under 2% across most developed regions for 2024, mostly a bit above the consensus outlook. For 2025, our growth outlook remains largely the same as a quarter ago and is in line with the consensus.
While our outlook is benign, risks related to high interest rates, stubbornly hot inflation and geopolitics are sources of uncertainty.
RBC GAM GDP forecast for developed markets
Note: As of May 30, 2024. Source: RBC GAM
Fixed Income
Bond yields have risen slightly in the past quarter as investors weighed the possibility that central banks may ease policy at a more gradual pace than previously expected.
Tighter monetary conditions and rising fiscal deficits suggest that real interest rates may settle at a higher level on a sustained basis. Adjusting for this, we could conclude that the U.S. 10-year yield is priced for gradual declines over the years ahead as inflation moderates toward the 2% target from just over 3% currently
Our view is that fixed income markets offer decent return potential in the mid single digits and with only modest valuation risk over the year ahead, especially in an environment where central banks are actively cutting rates.
U.S. 10-year T-Bond yield Equilibrium range
Note: As of May 31, 2024. The fair value estimates are for illustrative purposes only. Corrections are always a possibility and valuations will not limit the risk of damage from systemic shocks. It is not possible to invest directly in an unmanaged index. Source: RBC GAM
Equity Markets
Equity markets climbed to new highs in the past quarter, although the biggest gains have been highly concentrated in a small group of mega-cap technology stocks that have benefited from trends in artificial intelligence.
Valuations in markets outside of U.S. large-caps are less demanding, meaning global equity markets could offer attractive returns should economic and corporate-profit growth remain positive.
A lot of the good news is already priced into the U.S. large-cap equity market and expectations are high. The current combination of strong nominal earnings growth, continued expansion in profit margins and elevated investor confidence is becoming increasingly critical to sustaining the bull market.
Global stock-market composite Equity-market indexes relative to equilibrium
Note: As of May 31, 2024. Source: RBC GAM