Money matters

Corporate Earnings - Investment Outlook 2024

Global markets recovered well towards the end of 2023. And with some central banks pausing interest rate hikes towards the end of last year, there are signs that they may have reached their peak. So, what does 2024 hold for financial markets? And where should investors look for opportunities?

In this Investment Outlook, we also take a look at:

Interest rates

Asset allocation

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Section 2

Corporate earnings

Brighter times ahead for the US

Despite the US economy showing resilience in 2023, corporate earnings announcements (where companies release their quarterly performance figures) haven’t been as positive. While companies have mostly managed to remain profitable, growth has been stagnant, which was to be expected against a backdrop of rising interest rates.

Higher profits on the horizon?

As a result, US earnings faced a ‘recession’ last year, when corporate profits fell for three straight quarters. But the outlook is starting to improve. Typically, when earnings experience a downturn, profits eventually rebound. This is because of companies cutting costs, and therefore benefitting even more than they would have when the economy improves.

US consumers still feeling the squeeze

This will depend on consumer spending this year, though. Despite most mortgages being locked in for 30 years before interest rates went up, consumer sentiment remains fragile. A survey by the University of Michigan last November found that nearly half of respondents were worse off financially than a year ago – mostly because of higher prices.

What to watch - US.

After a year of recovery, there are high expectations for some sectors in the US.

Mega-cap tech

The boom of artificial intelligence (AI) last year saw a lot of well-known technology firms spend big to keep up. The so-called Magnificent Seven – Apple, Microsoft, Amazon, Nvidia, Meta and Tesla – did very well as a result of the excitement. These seven stocks accounted for most of the positive returns from the S&P 500 in 2023.

Healthcare

With the sector beginning to normalise after the disruption caused by the Covid-19 pandemic, it’s expected to be a key driver in US earnings growth this year.

Financials

At the other end of the table is the financial sector, where expectations are low. Having seen severe challenges in 2023, such as the collapse of Silicon Valley Bank, the sector now faces further issues such as slowing loan growth, rising credit concerns and increased competition.

UK playing catch-up

The UK’s stock market is trailing behind its global peers. One reason for this is how prominently certain sectors feature in the market. For example, while technology firms had a stellar 2023, particularly in the US, the information technology sector holds a significantly lower weighting this side of the Atlantic.

On the other side of the coin, financials, which as we’ve said had a challenging year, take up a larger chunk of the UK stock market compared with the US, as seen in the data.

Because the UK is dragging its feet a little in terms of economic growth and market performance, the forward-looking investor may well be drawn more to the US instead for the time being. But once confidence in the Bank of England’s policies and overall economic direction improves, the UK market should become more appealing again. In the meantime, the most popular strategy for UK investors will be to pick cheap stocks with worthwhile dividend yields.

Investment Outlook 2024

View more insights from this year's investment outlook.

Investment Outlook 2024

Overview

Our Investment Outlook 2024 sums up the issues that affected the global economy in 2023 and looks ahead to where the best prospects of 2024 might lie.

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Interest rates

Section one

For investors, last year was all about central banks battling to bring rising inflation back down by hiking interest rates. This created a challenging macroeconomic environment for investors at the start of 2023.

Company profits are hit by higher borrowing costs when interest rates rise, as well as people being encouraged to save rather than spend. And existing bonds become worth less as new bonds come with higher yields. So higher interest rates can be bad for both stock and bond markets.

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Asset allocation

Section three

With everything mentioned so far taken into consideration, our funds are positioned to lean into the positives while also earning the bond yields that come in a higher interest rate environment.

Within bonds, we’re earning 4-6% yields from the global government and corporate bond markets at the time of writing. We’re also benefiting from higher sterling corporate bond yields, which we bought into opportunistically in 2023.

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