The accelerated rise in interest rates over the past year, a total of about four percentage points, has caused stress in some parts of the economy.
The better-than-average quarterly gains were driven primarily by the emergence of artificial intelligence as an investment theme and the exceptional performance of companies that investors think will benefit most from the expanded use of AI.
Banks make up a larger share of the overall market in Europe than they do in the U.S., and European banks will have to outperform if European markets are to outperform the U.S. overall.
Asian central banks appear to have largely completed their rate-hiking cycles, and we expect them to begin easing as soon as later this year.
We expect emerging markets to retain their advantage with respect to semiconductor manufacturing over the medium term, with Taiwan and South Korea continuing to dominate.
Executive summary
The global economy is slowing as higher borrowing costs and tighter financial conditions weigh on activity. At this late stage in the business cycle, short-term interest rates are likely nearing their peak, bonds are more appealing than they’ve been in a long time, and equity markets could be vulnerable to correction should a recession materialize.

Economy
We anticipate that developed-world economies will fall into a mild to middling recession within the next few quarters.
Fixed income
Over the longer term, we still expect real interest rates to rise slightly above zero as savers will ultimately need to be compensated for saving instead of spending.
Equity Markets
We would prefer to see expanding breadth alongside a rising stock-market index to confirm a healthy, durable, bull market.