Stocks Likely to Withstand Market Downturn if Interest Rate Reductions Postpone, Economist Suggests

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Written By Dean McHugh

The latest stock gains are anticipated to persist through the year’s end, weathering any mid-year market adjustments, contingent on central banks delaying interest rate reductions beyond current market expectations.

Despite potential seasonal fluctuations, the markets might adjust to a new trajectory for rate cuts from central banks, suggests Ludovic Subran, Allianz’s chief economist.

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Market Expectations vs. Central Bank Moves

Investors are currently bracing for a significant shift in central bank policies, expecting an early pivot. However, Subran points out that indications now lean towards a mid-year pivot, possibly smaller than initially anticipated.

Monetary Policy and Central Banking
Credits: DepositPhotos

“That means substantial volatility ahead, when people are going to re-rate,” Subran mentioned, emphasizing that the gains seen in late 2023 and early 2024 should remain by year-end.

Recent Stock Market Performance

The final two months of 2023 saw European stocks surge, with the Stoxx 600 index achieving a 12.7% annual gain. Similarly, the U.S. S&P 500 has been climbing since late October, recently surpassing the 5,000 mark for the first time.

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Earnings Season and Market Sentiment

The current earnings season has been robust, with only minor market sentiment disturbances from some central bankers tempering rate cut expectations, particularly in Europe.

“I think it’s going to be very seasonal,” Subran predicted, foreseeing a potential correction as investors adjust to the reality of more modest central bank pivots due to U.S. growth resilience or persistent inflation in Europe.

Year-End Outlook

Despite these challenges, Subran remains optimistic about the year’s investment returns.

Ludovic Subran - Protectionism - YouTube
Credits: Youtube

“By the end of the year, we’re going to have quite some good 5-10% equity returns,” he stated, viewing this as a positive outcome in a year marked by broader economic normalization.

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