With the failure of a recession to materialise, 2023 has been a good year for equity indices. However, their rise was uneven, marked by strong selectivity among mega-caps in the US and underperformance by small and mid-caps, hit by the historic rise in interest rates.

For 2024, we anticipate a continued soft landing for the developed economies and stabilization of the Chinese economy.

But can we rule out the risk of a downturn in the equity markets?

The challenge of high real interest rates

High real bond yields are traditionally unfavourable to the expansion of price/earnings (P/E) ratios. Nonetheless, it was a rise in valuations that carried equity markets into 2023, against a backdrop of stronger-than-expected economic growth.

In 2024, we expect growth to slow and inflation to continue to fall, putting downward pressure on real rates and creating a favourable environment for stock market valuations. However, given the rate levels already reflected in equity valuations, we believe that this support will be relatively weak or non-existent.

Read more: Can equities fall, even ‘without’ a hard landing? | Candriam (candriamoutlook.com)