As we head into the second half of 2024, investors face a landscape of volatility and uncertainty. While the turmoil surrounding the yen trade may have subsided, other risks remain.
These risks, if realized, could disrupt markets and change investment strategies. Macquarie analysts have identified three key risks that investors should watch closely: the U.S. election, China’s economic performance, and the valuation of growth and technology stocks.
The upcoming US elections stand out as the most significant risk factor. Given the global importance of the US economy, any instability surrounding the elections could have far-reaching consequences.
The worst-case scenario is an inconclusive or highly contested outcome, prolonging uncertainty and increasing market volatility. A political sweep, where Democrats or Republicans gain control of the House of Representatives and the presidency, could also cause significant market turmoil.
A Democratic victory would result in a larger primary budget deficit, perhaps exceeding 3-3.5%, while a Republican victory would challenge America’s institutional foundations. By contrast, a divided government, where control is divided between the parties, is seen as the more favorable outcome, as it is more likely to prevent extreme policy measures and reduce volatility.
However, election campaigns are volatile, and the odds of this outcome can change quickly, especially as debates progress and voter sentiment changes.
The health of China’s economy is another critical factor for global markets. While the current consensus assumes a weak but not deeply deflationary economy, China’s history of sudden policy shifts, such as the unexpected reopening of the economy in October 2022, suggests the country is still capable of making rapid changes that could surprise markets.
Any further deterioration in China’s economic performance could have significant implications, particularly for global supply chains and commodity prices. The strength of Chinese policymakers in responding to economic challenges will be crucial.
If the government chooses to take strong stimulus measures or take other unexpected policy actions, markets could experience increased volatility.
The third risk relates to the valuation of growth and technology stocks, sectors that have seen significant investment driven by enthusiasm for artificial intelligence and other innovations.
“At this stage, we believe growth patterns have not yet reached ‘bubble territory’ while EPS growth rates remain strong (~17% in 2Q24), ROE rates are at weaker than fundamentals (~33% for the SPX) and free cash flows remain strong,” Macquarie analysts said.
“Over the past few months, investors have become concerned that significant overinvestment in AI could lead to a reduction in currently high valuations,” the analysts said. Any unexpected slowdown in earnings growth could lead to sell-offs in high-growth sectors and broader market cycles, leading to increased volatility.
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