Market outlook - June 2024

• “Forecasting the development of stock  markets has already been easier than today.   Currently, there is a host of positive and   negative aspects, and it is all but clear   which of them will gain the upper hand,” Björn   Jesch, Global CIO, states. Among the positive   aspects are relaxing  inflationary pressures,   mainly sound corporate balance sheets and a growing real purchasing power, at least in some of the industrial nations. Moreover, there are signs fuelling hopes that both, Europe and the United States will be able to avoid a recession.
• But there are also several significant negative aspects – first of all, diverging growth perspectives: Europe is recovering slowly, setting out from a low level, whereas the weakest months of the U.S. economy might still lay ahead, and China still seems to depend heavily on state support in order to achieve its growth target of five percent. The second weak spot are stock market valuations, which are no longer favorable – neither in relation to their own history nor in comparison with the valuation of bonds.

• “And a third point is that corporate profit margins are close to record highs, and currently hardly anything argues in favor of any further upward space,” Jesch addsThe fourth and last negative aspect are the continuing high geopolitical risks – Russia’s war of aggression against Ukraine, the smouldering (trade) conflict between the United States and China, and – though not directly comparable with the dimension of the first two risks – the uncertainty around the outcome of the looming U.S. presidential election. 

• The bond market could also hold several surprises. “The disinflation path is expected to make some more twists and turns so that the coming months might bring about nervous market reactions,” Jesch explains.

Topics driving capital markets

Economy: moderate growth in industrialized countries expected – India more dynamic than China

• Growth is falling slightly in the United States, employment figures are rising, and consumers continue to spend money, albeit at a somewhat slower pace. All in all, we expect a soft landing of the U.S. economy, which the Eurozone economy has already left behind.

—The Chinese economy is expected to be driven by consumption and investment this year, although we forecast growth to weaken slightly every year.

—India should remain the growth champion, particularly due to its heavily growing services exports.

Inflation: further decline expected

• Inflation rates should continue to trend downwards both in the United States and in Europe, supported by the continuously restrictive monetary policy of Fed and ECB. In the Eurozone, lower energy prices are accountable for falling inflation rates.
• The Japanese inflation rate should also weaken but remain clearly above the threshold of one percent in the year to come.

Central banks: European Central Bank has cut interest rates for the first time

• At its rate-setting council in June, the European Central Bank cut its key rate by 25 basis points, as widely anticipated, putting it ahead of the U.S. Federal Reserve.

• In the United States, the Fed could take its first cutting step in September 2024, on condition that the data on inflation, job market and economic growth allow for it.

Risks: inflation and geopolitical hotspots

• If inflation remains on a higher level in the United States than today expected due to economic dynamics, rate cuts can be postponed or rates even be increased.

• The main risks in Europe currently are a delayed upswing of private consumption, weaker global demand and the further development of geopolitical troublespots.

S&P 500: Great Eight* profit machine

Consensus earnings expectations for the next twelve months, indexed

^{*Great Eight: Apple, Meta, Microsoft, Nvidia, Amazon, Eli Lily, Alphabet, Tesla DWS forecasts March 14, 2024. Past performance is not indicative of future results. Sources: FactSet, Bloomberg, DWS Investment GmbH, as of 03 June 2024}

 

Equities USA

High valuations and probably little upward potential short-term

In the short run, we see only little upward potential for U.S. stocks – their valuations are already very high, equity risk premiums low.  The uncertainty around the looming U.S. presidential elections is an additional factor. Moreover, corporate upward revisions in earnings should already be largely priced in.

 

Equities Germany

Valuation discount versus U.S. equities continues to be above average

Growth figures for the German economy have been slightly revised upwards recently. The latest figures of the business climate index ifo, which have risen for the third time in a row, also painted a slightly rosier picture. The German stock market index Dax continues to trade at a valuation discount versus the U.S. S&P 500, which is well above average. In our view, this discount might decrease in the foreseeable future.

 

Equities Europe

Still slightly optimistic

Real purchasing power is rising in Europe, and this region is additionally well positioned, if the global economy grows faster than expected. We expect the Stoxx 600 to grow slightly, contrary to consensus which expects a minor decline.

 

Equities Emerging Markets

Waiting for permanent positive impetus

Emerging Market stocks are currently marking the tail-end in 2024 with a view to performance. The MSCI Emerging Markets is only slightly positive. Elections and comparatively inexperienced governments remain a topic in several states, and headwinds are coming from continuously high U.S. bond yields. Even if some markets in Asia appear to be interesting, we remain neutral on Emerging Markets as a whole.

• Interest rate markets have given multi-asset experts a hard time this year. Contrary to the
  expectations of most market participants, yields have not fallen but risen instead. “However, we have dealt with this situation very well. Our average duration of bonds including cash is   very low at 1.5 years,” Christoph Schmidt, head   of the DWS Investment Strategy Multi-Asset says. Schmidt favors short maturities because their yields outperform those of longer maturities due to the still inverted yield curve. This helps to avoid the increased volatility of long maturities. In the current year, stocks have made the highest performance contribution.
• Schmidt currently focuses on quality stocks, scoring highly with robust earnings profiles and sound balance sheets. These are, for example, corporations in the health sector. Schmidt has an optimistic view on the further economic development which has surprised on the upside once again in the current year. Even though growth has slowed down year over year, corporate earnings proved to be resilient.
• Schmidt is confident that this trend will continue. There are, however, some risks such as an accelerating inflation rate. “This might exert pressure on stock and bond markets and would certainly hamper diversification within portfolios. However, this is not our base scenario,” Schmidt concludes. It is still mandatory to broadly diversify investments across all asset classes. Gold as a safe haven should be among them.

Inflation rates falling substantially

Development of inflation rates versus previous year (in percent)

^{Source: DWS Investment GmbH, as of beginning of June 2024}

The weakness of the euro should be over. The divergence of the benchmark interest rate path of the United States and of the Eurozone appears to have peaked. The euro could additionally benefit from the fact that U.S. economic growth has fallen short of the market’s expectations. The upward potential of the euro, however, seems to be limited on the current level.

Continuously high demand from Asia, strong purchases by central banks and increased geopolitical risks are supposed to support the gold price even on its currently high level. If the Fed’s monetary policy is more restrictive than expected and rates are not cut as already anticipated by the markets, this could burden the gold price, at least in the short run.

Legend The strategic view by March 2025 The indicators signal whether DWS expects the asset class in question to develop upwards, sideways or downwards. They indicate both the short-term and the long-term expected earnings potential for investors. Source: DWS Investment GmbH; CIO Office, as of 07 June 2024
	Positive return potential
	Potential profits but also risk of loss rather limited
	Negative return potential

Forecasts are based on assumptions, estimates, views and hypothetical models or analyses which may prove to be incorrect. Past performance is not indicative of future results.