2024 Global Equity Outlook
Third Quarter
Key Takeaways
The divergence in consumer spending patterns continues with less affluent consumers becoming more price-sensitive amid high inflation, slowing wage growth and the high cost of borrowing.
Accelerating economic growth, falling inflationary pressure and easing monetary policy contribute to a supportive environment for emerging markets stocks.
Consumer Spending Patterns Sustain the Economy for Now
Entering 2024, expectations for the global economy and markets hinged on the ability of consumers to help spend us through an expected slowdown. There have been some weak spots in the data, but with midyear upon us, we’re finding that consumers are faring better than you might expect.
After slumping for three months, the Conference Board’s measure of how consumers feel about current conditions and their outlook for the next six months turned up in May.1 This comes despite stubbornly high inflation, a slowdown in hiring and wage growth and the high cost of borrowing for homes and other purchases.
Earnings Reflect Divergent Spending Patterns in K-Shaped Economy
If we drew a chart of the economic fortunes of the affluent versus the less affluent, it would be shaped like a K with the wealthy trending up and the less wealthy trending lower. We can see this in the results for consumer-oriented companies. While they are experiencing relatively stable demand, divergent spending patterns for higher- and lower-income shoppers continued in the first half of the year.
High-income consumers are proving resilient despite higher prices. This is reflected in strong earnings reports from several U.S. airlines amid robust travel demand. Due to higher credit card usage, we also saw credit card companies outperform Wall Street expectations.
Still, there are plenty of cracks, especially among less affluent consumers. Businesses such as retailers and restaurants reported that their customers are trading down to less expensive products and services. They also noted that low-income consumers are particularly price-sensitive, and many are moving away from popular brands to private-label offerings.
This trend is also borne out in e-commerce data. Analysis from software company Adobe shows that while online sales continued to climb during the year’s opening months, shoppers are gravitating toward less expensive options. This includes a significant jump in sales for the cheapest goods in categories such as personal care, electronics and apparel.2
AI Capital Expenditures Propel Growth in Tech Sector
First-quarter reporting also highlighted an acceleration in the artificial intelligence (AI) arms race. Demand for cloud computing services continued to climb, spurring higher-than-expected capital expenditures (CapEx) by Meta, Alphabet and Microsoft. These AI enablers also indicated that the rapid pace of spending would continue.
Data center infrastructure providers are among the businesses benefiting from higher AI CapEx. For example, Vertiv, a maker of power and thermal management equipment used in data centers, reported that AI-related demand would likely continue to provide a tailwind to its sales pipeline. A good portion of those orders is scheduled for shipment in 2025.
AI spending may also help the semiconductor market recover from a long slide. We expect this to benefit companies throughout the chip production supply chain, including specialty materials providers, capital equipment makers, semiconductor developers, and manufacturers.
Outlook Improving for Small-Caps
Having suffered the brunt of rising rates and economic uncertainty, we believe the backdrop is becoming favorable for small-cap stocks in developed and emerging markets.
A soft economic landing now seems more likely, and select developed and emerging markets central banks have cut interest rates as of early June. All eyes now are on the U.S. Federal Reserve (Fed). In our view, further cuts would be positive for small-caps globally and allow investors to refocus on earnings growth as a driver of stock prices.
We believe the reshoring and nearshoring trend is one of those earnings drivers for small-cap companies. We’re only in the early stages of a long-term trend of businesses bringing key links in their supply chains back to the U.S. and other nearby countries. Construction and ongoing manufacturing activity at these new facilities are positive for small-caps, which have historically derived most of their revenues from domestic sources.
A strong pipeline of initial public offerings (IPOs) and an expected pickup in mergers and acquisitions (M&A) also contribute to a better environment for small-caps. We believe an uptick in IPO activity would generate more interest in the asset class and create a deeper pool of companies for active managers to choose from. Likewise, M&A can benefit small-caps as larger companies turn to acquisitions of smaller companies to boost their organic growth rates.
Positive 2024 Outlook for Emerging Markets Stocks
The economic backdrop continues to be supportive of emerging markets (EM). With growth accelerating, inflation pressure lessening and monetary policy easing in its early stages, EM economies are forecast to grow 4.2% this year — more than twice the rate of developed markets.3
In addition, we anticipate a gradual broadening of monetary easing in the second half of the year as disinflation progresses. Central banks in Brazil, Mexico, the Czech Republic and a handful of other EM economies began cutting their lending rates in 2023 and the first half of 2024.
However, the Fed’s “higher for longer” stance has deterred aggressive easing and made further rate cuts in emerging markets somewhat dependent on the U.S. central bank. Some EM central banks may be reluctant to cut rates while the Fed remains on hold because global investors tend to move their assets to the U.S. when interest rate spreads narrow.
China’s Economic Recovery and Policy Plans Show Encouraging Signs
China’s economy grew faster than expected in the first quarter. We believe a continued recovery in exports and an acceleration of fiscal spending will support near-term growth. However, the housing market continues to face downward price pressures from an excess supply.
Though policymakers’ primary focus has been on exports and manufacturing investment, they’ve taken steps to help support the housing sector. Authorities recently cut mortgage downpayment requirements to record lows and removed housing restrictions in some cities. They’ve also announced plans to purchase excess housing inventory. While the policy direction is encouraging, we think housing activity will likely remain weak through the end of the year.
Consensus estimates are increasingly less bearish on Chinese stocks, and the country’s stock market was in positive territory year-to-date as of the end of May.4 If property prices stabilize, we could see pent-up demand for housing and housing-related consumption, which could be positive for property, consumer and internet stocks.
U.S. Tariffs Target China’s “New Three,” but Economic Impact Should Be Limited
In May, the Biden administration announced new tariffs on select Chinese products, including the so-called New Three: solar cells, lithium-ion batteries and electric vehicles. China’s policymakers have prioritized gaining a competitive edge in these high-tech markets, which stand in contrast with the “Old Three”: appliances, furniture and clothing.
We don’t consider the tariffs a major threat to China’s economy. The country already dominates the New Three markets. And, despite recent growth in these areas, they account for less than 5% of China’s total exports.5 Furthermore, the country’s EV exports to the U.S. are negligible due to existing tariffs and its solar products are largely traded through other Asian markets to the U.S.
We think it’s likely that these actions were primarily designed to protect strategic U.S. industries from an influx of cheaper Chinese products without escalating tensions with China ahead of the U.S. presidential election.
¹ Matt Ott, “U.S. Consumer Confidence Rises in May After Three Months of Declines,” Associated Press, May 28, 2024.
² Adobe, “E-Commerce Spend Grows to $331.6 Billion, as Consumers Trade Down to Cheaper Goods Online,” Media Alert, May 9. 2024.
³ International Monetary Fund, “Steady but Slow: Resilience amid Divergence,” April 2024.
⁴ Morningstar® Direct as of 5/31/2024. Based on MSCI China Index.
⁵ Citi Research, “China Economics: Out with the Old Three and in with the New Three,” January 8, 2024.
References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.