Money managers are now more optimistic about the U.S. economy than they were at the start of the year due to a strong stock market, easing inflation, steady unemployment figures and strong corporate balance sheets, according to the latest Global Investment Management Survey by the Franklin Templeton Institute released on June 12.
Respondents now expect 2.3% gross domestic product growth in 2024, on average, compared to expectations of 1.6% growth in January's survey. Inflation, as measured by U.S. core personal consumption expenditures, is expected to level off and finish the year around 2.9%, essentially in line with the current reading of 2.8%, the survey found. Most survey respondents expect the Fed funds rate to end the year at between 4.75% and 5.25%.
"When we first conducted this survey in January, we said a global recession should be avoided," said Stephen Dover, chief market strategist and head of the Franklin Templeton Institute, in a release issued along with the survey. "Today's economy is better than it was at the beginning of the year. In fact, we're now expecting just one or two interest rate cuts from the U.S. Federal Reserve rather than the four we'd predicted six months ago."
In addition, nearly 66% of survey respondents anticipate more volatility in the U.S. equity market. While small-cap stocks were favored in January, sentiment has now shifted in favor of U.S. growth and U.S. large-cap stocks due to their free cash flow yield, return on invested capital and return on equity.
With respect to fixed income, nearly two-thirds (63%) of respondents expect the 10-year U.S. Treasury rate to be between 4% and 4.50% at the end of 2024, down from 4.61% at the end of May. Investment-grade bond spreads over U.S. Treasuries with similar maturity profiles are expected to be between 90 and 100 basis points at the end of 2024 compared to the current reading of 85 bps. High-yield spreads are expected to be between 325 bps and 375 bps compared to the current reading of 308 bps.
With respect to alternative asset classes, secondary investments continue to look attractive to respondents given the stalled exits in private equity as well as institutions' need for liquidity. Seasoned private credit managers are expected to help fill the void created by the pullback of traditional lenders. Moreover, real estate debt appears to be a good option given historically attractive risk-adjusted returns.
"It's certainly good news that the economy and corporate earnings have been stronger than expected in the first half of this year," Dover added in the release. "The downside is that we believe there's no more upside for the S&P 500 Index now. In other words, the stock market is expensive."
Respondents were also asked about their views on overseas economies.
Survey respondents are more positive on Europe's economic growth prospects than they were six months ago, expecting 1.2% GDP growth in 2024, on average, compared to their prior expectation of 0.6% GDP growth in January 2024.
The stock markets of three major Asian nations — India, Japan and China — are expected to outperform the U.S. equity market in 2024. Japan is especially favored by 33% of respondents due to the country's structural and corporate governance reforms. The majority of respondents expect to see 3% to 5% growth in China's GDP.
Respondents also said they expect developed market stocks to outperform emerging market stocks this year given improving fundamentals in Europe and Japan. India, however, is an exception as its economic transformation continues.
The survey was conducted in May and comprised the views of more than 250 of Franklin Templeton's senior investment professionals from different teams around the world.
