The emphasis on inflation and growth as the make-or-break elements is in line with the findings of Bank of America's latest fund manager survey. It showed recession expectations were at the highest since April 2020, while a "stagflation" scenario of low growth and high inflation was "overwhelmingly" the consensus view.
Such worries look warranted. According to Bloomberg Economics, the global economy is heading for its weakest performance in years, excluding the financial crisis and COVID periods. The IMF said last month the situation is rapidly worsening.
"The outlook from here onward will be influenced by the probability, depth and longevity of recession," said Fabiana Fedeli, chief investment officer for equities, multiasset and sustainability at M&G. "There are still pockets of opportunity where companies with strong fundamentals that are able to weather the storm get sold off in times of market panic."
Heading into year-end, the market direction hinges on two key events coming next week — U.S. inflation data on Tuesday and the Fed policy decision a day later. Some good news has emerged here: Price increases have started to cool after hitting a four-decade high and the central bank has signaled it may slow the pace of rate hikes.
Despite those signs, investors remain cautious, and the S&P 500 is on course to snap a two-week winning streak ahead of the Fed meeting.
"A sustained rally in risk assets isn't likely until inflation is more firmly downward trending toward target," said Shoqat Bunglawala, head of multiasset solutions for EMEA and Asia Pacific at Goldman Sachs Asset Management. He's maintaining a relatively defensive asset allocation in balanced portfolios.
Ben Powell, chief investment strategist for APAC at the BlackRock Investment Institute, takes a similar tone, saying stocks aren't yet reflecting the full impact of tighter monetary policy.
"We've had the lightning of policy tightening in 2022, and now the thunder will follow — that is to say, the damage," he said. "Maybe we're seeing some signs of the slowdown in exports and housing, but that's going to become clearer next year, and the market needs to price that a bit more effectively."