Interest Rate Cut Fantasies Under Scrutiny

• Harald Holzer, Chief Investment Officer of Kathrein Privatbank, is skeptical that there will be more than three interest rate cuts in 2024.
• Historically, market increases are most likely in the period following the last interest rate hike and before the first interest rate cut.

Vienna, January 12, 2024 / During the New Year reception of Kathrein Privatbank, Chief Investment Officer Harald Holzer presented the market outlook for 2024. He anticipates no recession in the USA and the Eurozone, accompanied by three interest rate cuts by the central banks in each region. Many investors expect up to six interest rate cuts, to which Holzer commented, "Inflation is too persistent, and central banks will not risk reigniting it with overly aggressive interest rate cuts." For the stock markets, Kathrein expects a positive performance based on current data, possibly even in the double digits, though the political and economic environment can change rapidly. The bull market is expected to continue in 2024. Bond yields are projected to increase by the end of the year according to current forecasts, hopefully resulting in positive real yields.

FATMAANN no longer driving forces

The acronym FATMAANN encompasses the giants Meta (formerly Facebook), Apple, Tesla, Microsoft, Alphabet, Amazon, Netflix, and Nvidia, which significantly contributed to the strong performance of the US stock market in 2023. Holzer explained, "The year-end rally demonstrated a broad-based market upswing." Current forecasts suggest that the mega-caps will underperform in 2024 overall. However, their impact should not be underestimated, as the market value of Microsoft alone is as large as the entire market capitalization of the UK.

Upside potential in the markets

Historically, the markets are in a very favorable environment. The S&P, on average, increases by 21.36% annually between the last interest rate hike and the first interest rate cut (based on the average annualized stock returns in interest rate cycles since 1990). The last interest rate hike in the USA was on July 26, 2023, and since then, the S&P 500 has already gained 12.6%. This means there is theoretically further upside potential. The positive performance is also supported by experts' classification in the bull market cycle. Where are we in the cycle? The bull market began in March 2020. The average duration of a bull market is historically 64 months, with the average P/E ratio at the beginning being 14.3 and at the end of the cycle reaching 21.3. Harald Holzer stated, "By the end of 2023, the P/E ratio in the S&P 500 was 18.2, meaning there is still 17% potential upside." However, past values do not provide fixed forecasts for the future.

Also noteworthy are analysts' profit expectations, anticipating a 4.5% growth in corporate earnings in 2024.

Economic Outlook, Inflation, and Interest Rates

In the USA, after a surprisingly robust economic development in 2023, a soft landing is expected in 2024, with decreasing inflation trends and positive growth. In Europe, such a rapid recovery is not expected, but a recession is also unlikely.

It is forecasted that inflation in the Eurozone will be 2.25% and in the USA 2.4% in the next 12 months. Market participants believe that twice as many interest rate cuts are possible as forecasted by the FED. Kathrein's current position is that there will be three interest rate cuts in both the USA and the Eurozone due to persistent inflation. Interestingly, stronger interest rate cuts in Europe are expected in the second half of the year compared to the USA. Kathrein speculates that an interest rate environment similar to the period 1999-2008 will occur. This would mean that inflation stabilizes at around 2.5% by the end of 2024. The real policy rate should be 1.4% (as in the period 1999-2008), resulting in a policy rate in the Eurozone of 3.9%, and the yield on the 10-year German government bond would be 5.0%.

Risks and Influencing Factors for 2024

"The risks for the capital markets have not diminished in 2024, and in addition, more than half of the world's population will be voting this year," explains Holzer. The upcoming elections in the USA, the United Kingdom, and India are significant political events whose outcomes could have considerable effects on market dynamics. China remains uncertain regarding its economic development. The ongoing conflict in Israel/Gaza could impact oil prices and global trade routes. There is no end in sight for the war in Ukraine. In this complex environment, a careful analysis and strategic approach will be crucial to successfully navigate the challenges of 2024.

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Investing in securities involves the possibility of price fluctuations due to market changes at any time. Past performance representations are not reliable indicators of future results.