2 things that could upset the market consensus in 2024

Lazard's Chief Market Strategist Ronald Temple is sticking to consensus, arguing we are in for a soft landing that will pave a natural path towards rate cuts. 

In our main interview, Temple told me he expects 100 basis points in interest rate cuts from the US Federal Reserve this year and next. Furthermore, unlike the European Central Bank which will also likely cut rates this year, he argues it won't be doing so into a recession.

It all sounds pretty good, doesn't it? It also sounds dangerously optimistic.

So what could upset this Goldilocks narrative? Two wars in Europe and the Middle East are one reason while the other comes down to the impact humongous fiscal deficits can have. While governments say they have their liabilities under control and that they can repay them, there are plenty of questions about the long-term sustainability of government spending.

After all, it was not that long ago when Liz Truss was ousted as Prime Minister in the history of the United Kingdom over her handling of a broken economy.

In this edition of Livewire's Rapid Fire, Temple answers some of the market's burning questions. In addition to his views on the soft landing, we also cover his thoughts on whether he thinks we will still see an earnings downgrade cycle in the US, to the biggest geopolitical risk investors need to be keeping an eye on.

EDITED TRANSCRIPT

Hans Lee: All right, Ron Temple from Lazard. This is the Livewire Rapid Fire. Are you ready to go?

Ron Temple: Let's do it.

Lee: Your base case is for a US soft landing. What is the one thing that could upset that view?

Temple: I'll give you two things. One geopolitics, two deficits. I worry that deficits are on an unsustainable trajectory in the US and around the world. It's hard to know when it will go wrong but I do worry about the Liz Truss moment of Fall 2022 in the UK and that it could happen in the US someday.

Lee: In the past, you have argued that earnings downgrades are coming. Are they?

Temple: No. I think that was the case where I got it wrong last year. I expected margin pressure. I was worried about economic weakness but the US economy sailed through the rate hike cycle. This year, I think we're in rate-cutting mode. Growth will probably be quite good. Margin and price pressures largely are behind us - so it's largely a good story. 

Lee: Out of the US, India and Japan, where are you most bullish on from a cross-asset investing standpoint in 2024?

Temple: I would say S&P 493 in the US and Japan are closely tied. India is tough at 25 times earnings. A lot of good news is built in. But on a five to 10-year view, India looks really attractive.

Lee: So the current yield on a US 10-year bond is about 4%, and the current dividend yield of the S&P 500 is about 1.5%. What looks like the better buy to you over the next five years, bonds or equities?

Temple: Equities.

Lee: And finally, you help run a geopolitical risk team in your role, what are the biggest geopolitical risks for the year ahead in markets?

Temple: I think the biggest risk in the year ahead is probably the US election because it will lay the foundation for what will happen over the next four years or longer - in terms of geopolitical risk around Ukraine, geopolitical risk around China, and frankly the long-term viability of NATO and other military organisations. A lot is riding on this November 5th election in the US.

Stay up to date with Ron's thoughts on the key issues shaping the global economy and financial markets by hitting the follow button here.