While the year has seen remarkable market performance so far, investment specialist at GSFM, Stephen Miller, warned against complacency.
He said while the recovery in risk markets since the post-“Liberation Day” lows have been impressive, there have been some important elements of that scenario that have gone awry.
“First, there is the ‘TACO’ (Trump Always Chickens Out) phenomenon, where the administration has walked back some of the more severe elements of the ‘Liberation Day’ announcements. Second, there is very little evidence in the hard data that the ‘stagflation-lite’ scenario is a clear and present danger. Inflation has been more quiescent than anticipated and activity has been more resilient.
“And lastly, macro-focused analysts understandably tend to give substantial weight to macro variables such as interest rates, bond yields and budget deficits, which underplay structural elements that can be big drivers of equity market performance.
Contrary to what macro analysts initially thought, he said that structural elements like artificial intelligence (AI), tech, climate change, demographics and geopolitical fracturing were found to be more important.
He said there is still a chance that inflation will prove “sticky”.
Eric Souders, director and strategist at Payden & Rygel, similarly warned against complacency, saying he views the remainder of the year as a transitional phase, moving from an unclear policy direction to uncertain policy implications.
He said the “punchline” right now is that the market is operating with an optimistic outlook despite clear signs of a decelerating US economy – given the powerful combination of tariffs, immigration and fiscal policy.
Souders pointed to the fall in wage growth, which, coupled with declining inflation, suggests nominal gross domestic product will likely settle in the 3 to 4 per cent range.
He said this slowdown is expected to impact nominal spending, corporate revenue and corporate profits unless there is significant margin expansion.
“To that end, a re-acceleration in the US economy would likely require further easing in financial conditions, relaxation of the growth negative policy mix or a productivity boom.”
His advice with respect to portfolio positioning was to proceed with modest caution on price risk in credit, saying that Payden & Rygel’s favoured exposure within credit is emerging market (EM) debt.
With a different take was Nick Griffin, chief investment officer at global growth manager Munro Partners, who argued that despite a lot of noise that a bear market is not far off, the current situation is “nothing like” the 2008 financial crisis or the rate hikes experienced in 2022.
“We remain bullish on the US equity market and believe US exceptionalism will resume,” he said.
In his view, major macroeconomic cycles occur about every seven years, placing us about three years into the current cycle. He said this means we are now in a “recovery phase”, with cash rates poised to come down.
Griffin highlighted several factors, including US tariffs that have since been scaled back to lessen their economic impact on the US. He also noted the anticipation of further Fed rate cuts, which are expected to both restore consumer confidence and strengthen the economic climate.
“Lastly, and most importantly, fundamentals, specifically areas such as artificial intelligence, climate change and security, are all continuing to benefit from further investment, and in many cases investment in these areas is accelerating,” he said.
Griffin added that European defence spending will also aid structural growth, agreeing with Miller that macro analysts initially underestimated the impact of structural elements more generally.
Ultimately, he expressed scepticism about the likelihood of a significant slowdown in the US economy.
He said he continues to be optimistic about growth investing – particularly in AI – drawing a parallel to the early smartphone era before the advent of apps like Uber and Spotify. He said he sees global markets on the cusp of the next wave of AI opportunities, specifically in applications.
“It’s never been a more exciting time to be a growth investor.”
