(Bloomberg) — U.S. stocks will outperform the country’s government and corporate bonds for the rest of this year as the Federal Reserve continues to cut interest rates, the latest Bloomberg Markets Live Pulse survey shows.
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Exactly 60% of the 499 respondents said they expect U.S. stocks to deliver the best returns in the fourth quarter. Outside the US, 59% say they prefer emerging markets over developed markets. And as they ramp up these bets, they’re avoiding traditional havens like Treasuries, the dollar and gold.
It’s a risk-oriented view that echoes bullish calls on Wall Street following the Fed’s half-point rate cut this month. China’s biggest stock rally since 2008, after Xi Jinping’s government stepped up economic stimulus, also helped reinforce the bullish stance.
“The biggest challenge facing the U.S. economy is actually high short-term interest rates,” said Yung-Yu Ma, chief investment officer at BMO Wealth Management. “We had already focused on risky assets and US equities,” he said, and “if there was a pullback, we would consider adding more.”
The Fed cut its benchmark interest rate from a two-decade high on September 18, and the average official forecast predicted an additional half-point easing at the two remaining 2024 meetings, in November and December.
‘Space to cut’
The MLIV Pulse survey shows that 59% expect the Fed to make a quarter-point cut at each of these two meetings. Thirty-four percent expect stronger reductions in that period, up to a total of three-quarters of a point or a full point. That’s more in line with swaps traders, who are pricing in a total of about three-quarters of a point in cuts by year’s end.
Investor confidence that the Fed can achieve a soft landing has grown, putting the S&P 500 Index on track to rise for the first time since 2019 in September, historically the worst month of the year.
“The Fed has a lot of room to cut, as do many other central banks,” said Lindsay Rosner, head of multisector investing at Goldman Sachs Asset Management. “That creates a good environment for the economy, especially in the US. That does not take away the tightness of the valuations, but it does make them more justifiable.”
When asked which trade to avoid for the rest of the year, 36% – the largest group – said buying oil. Crude oil prices have fallen on concerns that rising production outside the OPEC+ alliance will create oversupply next year. In second place was buying government bonds, with 29%.
Government bonds are still on track to rise for the fifth month in a row. And while rate cuts may boost bonds, there are plenty of questions about fixed income given differing views on how quickly the central bank will cut borrowing costs as the labor market proves resilient. Investors are particularly wary of long-term government bonds, given the risk that inflation could rise again if the Fed eases interest rates.
What Bloomberg Strategists Say…
“The term premium of longer-term government bonds is expected to rise, while liquidity risk – which is already higher as the government continues to run large budget deficits – is likely to worsen.”
– Simon White, macro strategist for MLIV
The survey also showed little enthusiasm for the US dollar, another traditional haven. Eighty percent of respondents expect the dollar to end the year roughly flat or down more than 1%. The Bloomberg Dollar Spot Index is up less than 1% this year.
The MLIV Pulse survey was conducted September 23 to 27 among Bloomberg News terminal and online readers around the world who chose to participate in the survey, and included portfolio managers, economists and retail investors. This week’s survey asks whether the worst is over for commercial real estate debt. Share your opinion here.
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