Theme 1
The U.S. economy is moderating, but there are cyclical upturns elsewhere.
Theme 2
Global inflation tentatively resumes its last mile of deceleration.
Theme 3
Central banks cutting cycles are set to be slow and shallow.
Key themes
Hover over each tile to read more about this quarter's key themes.
U.S. growth is softening as lower-income households feel the bite of higher interest rates. Other developed markets are now enjoying cyclical upturns, yet the limited nature of their recoveries suggests that U.S. economic dominance still holds.
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The inflation scare of 1Q24 is now waning, but a few more months of soft inflation data are required to validate that disinflation is proceeding as necessary. Without a sharp labor market slowdown, global inflation will unlikely reach central bank targets until late 2025, if not 2026.
A first Fed rate cut could occur in September, provided inflation continues to decelerate and economic activity does not reaccelerate. Other central banks have started easing, but their next moves will fall back in line with the Fed’s actions.
Theme 4
Equity markets can eke out positive gains, provided the economic backdrop remains solid.
Theme 5
Elevated fixed income yields continue drawing investor interest.
Theme 6
With potential gains across asset classes, staying in cash is the leading risk.
That same economic strength that has delayed Fed cuts should support a positive backdrop for corporate earnings, ensuring that the set-up for U.S. equities remains reasonably constructive. Yet the concentration of gains does pose a risk.
Macro resilience should ensure a gradual rise in defaults rather than a sudden spike, meaning credit spreads are unlikely to widen significantly from their current levels. Fixed income yields are markedly higher than a few years ago.
Assets in money market funds have ballooned to a record $6 trillion, with investors attracted by elevated yields. Now, this cash represents a potential tailwind to risk assets.
Global economic growth broadens beyond the U.S.
Key takeaway
Global growth has broadened beyond just the U.S. But the limited nature of the upturns implies U.S. dominance remains.
After having weathered the post-COVID environment exceptionally well, the U.S. economy is now seeing a slight softening in growth. By contrast, while the Euro area, the UK, and several other developed nations experienced a meaningfully weaker growth outcome post-COVID, they have been enjoying a slight cyclical economic upturn. Yet U.S. economic dominance still holds. Europe’s recovery has a limited upside, being held back by lackluster credit demand and signs that upside economic surprises are already losing momentum.
Similarly, although China’s growth has also improved, it is being upheld almost solely by net exports. With the property sector showing no clear signs of bottoming and credit growth still weak, China’s recovery is unlikely to gain further traction. Meanwhile, the underlying resilience of the U.S. economy implies that any slowdown will be modest. The upshot is that even as segments of the global economy enjoy upturns, the limited nature of their recoveries means that the U.S. will likely remain the strongest performer.
Global growth
Quarterly, 1Q 2023 - 1Q 2024
Source: Federal Reserve Bank of New York, Bloomberg, Principal Asset Management. Data as of June 30, 2024.
Global inflation: A frustratingly slow last mile
Key takeaway
The last mile to central banks’ inflation targets is proving tough and may require some (small) cracks in the labor markets to materialize.
Global inflation progress continues to grab market attention. Although there has been significant improvement, the “last mile” in inflation is proving to be sticky and frustrating across most economies.
In the U.S., after a series of hotter than expected inflation prints, more recent data suggest U.S. inflation may have returned to its more disinflationary trend. The two key contributors to U.S. inflation remain shelter services, which various indicators including primary rents, new lease signings, median home prices, all indicate it should see significant improvement over the coming year, and core services ex-housing— the segment of the consumer basket most closely related to wage growth.
Provided the labor demand/supply balance continues to improve, a further softening in wage growth is likely and, therefore, core services ex-housing inflation should wane. It is doubtful that, without further cracks in the labor market, there will be enough of a softening to bring inflation all the way down to the Fed’s 2% target. But the improvement should be enough to assuage fears around renewed inflation pressures and a second inflation wave
Global inflation rates
Principal Asset Allocation GDP-weighted inflation, 2015-present
Note: Emerging markets calculated using GDP weights.
Source:Bloomberg, Principal Asset Management. Data as of June 30, 2024.
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Federal Reserve: Closing in on rate cuts
Key takeaway
We expect cuts in September and December, but that requires convincing and consistent evidence of slowing economic activity, a weaker labor market, and softening inflation.
Evidence of moderating economic activity and a rebalanced labor market suggest that inflation pressures should subside over coming months. We expect the first cut to come in September, followed by December – but it will certainly take additional positive inflation readings to cement the timing.
Investors can derive three key insights for the Fed's outlook:
Federal Reserve policy rate path
Fed funds rate and projections, 2021-present
Source: Federal Reserve, European Central Bank, Bank of England, Principal Asset Management. Data as of June 30, 2024.
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U.S. equities: Vulnerable but grinding higher
Key takeaway
Solid earnings growth should assure continued equity gains. The narrowness of the rally remains a concern, but a strong economic backdrop should promote a broadening of gains.
Prospects for significant interest rate cuts were an important driver of the market rally in the first half of 2024. Yet that same economic strength that has delayed Fed cuts should support a positive backdrop for corporate earnings, ensuring that the set-up for equities remains constructive, even if gains are not as strong as earlier in the year. The narrowness of market gains remains a concern, with the equity rally hostage to the performance of Magnificent 7 technology stocks.
Yet, the AI craze and delivery of strong earnings means that investors are still willing to pay higher multiples for those companies. Stretched valuations and very concentrated positioning may imply the Magnificent 7 only grind higher from here, but the secular trend upwards should persist over the long run. Furthermore, solid economic growth should support a broadening out of risk appetite and earnings growth across a variety of other companies, sectors, and markets which are meaningfully less stretched and, therefore, offer the potential for strong returns.
Magnificent 7 performance
Simple equal-weighted performance versus the S&P 500 and Nasdaq composite, indexed to 100 at January 1, 2020
Source: Clearnomics, Standard & Poor’s, Bloomberg, Principal Asset Management. Data as of June 30, 2024.
Learn more about the factors impacting markets and portfolios in the quarter ahead by downloading the full PDF.
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Yields to skew lower, but fewer rate cuts should limit the move
Key takeaway
Fed rate cuts should put downward pressure on U.S. Treasurys, but the impact will be limited by a shallow cutting cycle, as well as higher term premia as debt concerns persist.
With the Fed likely to start cutting rates later this year, Treasury yields should skew lower. However, the likely short and shallow Fed cutting cycle, coupled with elevated market scrutiny on fiscal sustainability, suggests that yields are unlikely to revert to the ultra-low levels of recent years.
Despite the significant repricing in rate expectations so far in 2024, fixed income has continued to deliver positive performance, predominantly because the macro resilience narrative remains intact.
More pertinently, the total yield generated from fixed income today is markedly higher than a few years ago, and credit is offering important additional carry to U.S. Treasurys.
Yield comparison
Yield-to-worst, 2013-present
Source: Bloomberg, Principal Asset Management. Data as of June 30, 2024.
A constructive backdrop for risk assets persists
Key takeaway
Rate cuts later this year will reduce the attractiveness of cash. Investors should already be considering how to optimize the constructive environment for risk assets.
With investors paring back their expectations for the timing and pace of rate cuts, assets in money market funds have continued to increase. Yet, with the Fed set to reduce rates later this year, the attractiveness of cash is set to decline and reinvestment risk is elevated.
The U.S. economy is cooling, but is not heading for recession. Inflation is sticky, but is not heading into a second wave. The Fed is cautious, but the next policy move will be a cut, not a hike. This backdrop, while not as convincingly positive as at the start of the year, is still constructive for risk assets—and a $6 trillion mountain of cash is ready to fuel risk assets.
Equities not only offer exposure to important secular themes that show little sign of fading, such as AI and technology, but also harness the positive growth environment. Bonds can offer important income stability and a hedge against downside risk. Alternatives such as real assets offer insulation in case inflation remains sticky or starts to trend higher again. With the potential for gains across the asset class spectrum, the main risk is staying in cash.
U.S. total money market fund assets
Trillions, 2000-present
Source: Clearnomics, Federal Reserve, Investment Company, Bloomberg, Principal Asset Allocation. Data as of June 30, 2024.
global market perspectives
For Public Distribution in the United States. For Institutional, Professional, Qualified and/or Wholesale Investor Use Only in other Permitted Jurisdictions as defined by local laws and regulations.
Losing some of the shine
3Q 2024
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Click through arrows below to learn more about our key themes.
U.S. growth will likely slow somewhat as lower income households pull back and corporates face higher refinancing costs. But with most other global economies still struggling, the U.S. will remain the strongest global performer.
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01
02
Theme 2
Global disinflation is showing signs of stalling.
After having made significant progress last year, inflation deceleration has flattened out. The last mile of disinflation toward central bank targets will require some economic slowdown and job market rebalancing and will take time.
03
Theme 3
Central banks believe they can cut rates without sacrificing inflation.
The Fed wants to cut policy rates, but it may be fazed by recent inflation surprises. It will likely cut policy rates two times this year, starting in September. Other central banks will also begin easing soon but will cut with greater urgency.
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5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
UK
U.S.
Japan
Europe area
1Q 2023
2Q 2023
3Q 2023
4Q 2023
1Q 2024
6%
5%
4%
3%
2%
1%
0%
Jan 21
Apr
21
Jul
21
Oct
21
Jan
22
Apr
22
Jul
22
Oct
22
Jan
23
Apr
23
Jul 23
Oct 23
Jan 24 Apr 24
Jul 24
Oct 24
Jan 25
Apr 25
Jul
25
Oct
25
Fed funds rate
Futures Implied as of March 29, 2024
Futures Implied as of December 29, 2023
500
450
400
350
300
250
200
150
100
50
Jan 2020
Jan 2021
Jan 2022
Jan 2023
Jan 2024
View next theme
View last theme
Magnificent 7
12%
10%
8%
6%
4%
2%
0%
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
U.S. Treasury
U.S. investment grade
Preferred securities
U.S. high yield
$6.0
$5.5
$5.0
$4.5
$4.0
$3.5
$3.0
$2.5
$2.0
$1.5
2000
2005
2010
2015
2020
2025
Global Financial Crisis
Pandemic
Fed rate hikes
$6.1tn
View next theme
View last theme
View last theme
Download Full PDF
Hear why Seema Shah, Chief Global Strategist, believes a shift toward easier financial conditions positions investors for potential outperformance during the remainder of 2024.
3Q 2024
Global market perspectives
Seema Shah
Chief Global Strategist
Principal Global Insights Team
Brian Skocypec, CIMA
Director, Global Insights & Content Strategy
Benjamin Brandsgard
Insights Strategist
2Q 2024
3Q 2024
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Federal Reserve: Closing in on rate cuts
Key takeaway
We expect cuts in September and December, but that requires convincing and consistent evidence of slowing economic activity, a weaker labor market, and softening inflation.
Evidence of moderating economic activity and a rebalanced labor market suggest that inflation pressures should subside over coming months. We expect the first cut to come in September, followed by December – but it will certainly take additional positive inflation readings to cement the timing.
Investors can derive three key insights for the Fed's outlook:
Federal Reserve policy rates path
Fed funds rate and projections, 2021-present
Source: Federal Reserve, Bloomberg, Principal Asset Management. Data as of June 30, 2024.
Download Full PDF
U.S. equity: Vulnerable but grinding higher
Key takeaway
Solid earnings growth should assure continued equity gains. The narrowness of the rally remains a concern, but a strong economic backdrop should promote a broadening of gains.
Prospects for significant interest rate cuts were an important driver of the market rally in the first half of 2024. Yet that same economic strength that has delayed Fed cuts should support a positive backdrop for corporate earnings, ensuring that the set-up for equities remains constructive, even if gains are not as strong as earlier in the year. The narrowness of market gains remains a concern, with the equity rally hostage to the performance of Magnificent 7 technology stocks.
Yet, the AI craze and delivery of strong earnings means that investors are still willing to pay higher multiples for those companies. Stretched valuations and very concentrated positioning may imply the Mag 7 only grind higher from here, but the secular trend upwards should persist over the long run. Furthermore, solid economic growth should support a broadening out of risk appetite and earnings growth across a variety of other companies, sectors, and markets which are meaningfully less stretched and, therefore, offer the potential for strong returns.
Magnificent 7 performance
Simple equal-weighted performance versus the S&P 500 and Nasdaq composite, indexed to 100 at January 1, 2020
Source: Clearnomics, Standard & Poor’s, Nasdaq, Principal Asset Management. Data as of June 30, 2024.
View next theme
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Download Full PDF
Yields to skew lower, but fewer rate cuts should limit the move
Key takeaway
Fed rate cuts should put downward pressure on U.S. Treasurys but the impact will be limited by a shallow cutting cycle, as well as higher term premia as debt concerns persist.
With the Fed likely to start cutting rates later this year, Treasury yields should skew lower. However, the likely short and shallow Fed cutting cycle, coupled with elevated market scrutiny on fiscal sustainability, suggests that yields are unlikely to revert to the ultra-low levels of recent years.
Despite the significant repricing in rate expectations so far in 2024, fixed income has continued to deliver positive performance, predominantly because the macro resilience narrative remains intact. More pertinently, the total yield generated from fixed income today is markedly higher than a few years ago, and credit is offering important additional carry to U.S. Treasurys.
Yield comparison
Yield-to-worst, 2013-present
Source: S&P Dow Jones, Federal Reserve, Bloomberg, Principal Asset Management. Data as of June 30, 2024.
12%
10%
8%
6%
4%
2%
0%
-2%
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
U.S.
Euro area
China
Download Full PDF
A constructive backdrop for risk assets persists
Key takeaway
Rate cuts later this year will reduce the attractiveness of cash. Investors should already be considering how to optimize the constructive environment for risk assets.
With investors paring back their expectations for the timing and pace of rate cuts, assets in money market funds have continued to increase. Yet, with the Fed set to reduce rates later this year, the attractiveness of cash is set to decline and reinvestment risk is elevated.
The U.S. economy is cooling, but is not heading for recession. Inflation is sticky, but is not heading into a second wave. The Fed is cautious, but the next policy move will be a cut, not a hike. This backdrop, whilst not as convincingly positive as at the start of the year, is still constructive for risk assets—and a $6 trillion mountain of cash is ready to fuel risk assets.
Equities not only offer exposure to important secular themes that show little sign of fading, such as AI and technology, but also harness the positive growth environment. Bonds can offer important income stability and a hedge against downside risk. Alternatives such as real assets offer insulation in case inflation remains sticky or starts to trend higher again. With the potential for gains across the asset class spectrum, the main risk is staying in cash.
U.S. total money market fund assets
Trillions, 2000-present
Source: Federal Reserve, Investment Company Institute, Bloomberg, Principal Asset Allocation. Data as of June 30, 2024.
Read more about this theme
Read more about this theme
12%
10%
8%
6%
4%
2%
0%
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
U.S. Treasury
U.S. investment grade
Preferred securities
U.S. high yield
$6.0
$5.5
$5.0
$4.5
$4.0
$3.5
$3.0
$2.5
$2.0
$1.5
2000
2005
2010
2015
2020
2025
Global Financial Crisis
Pandemic
Fed rate hikes
$6.1tn
View next theme
View last theme
View last theme
12%
10%
8%
6%
4%
2%
0%
-2%
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
U.S.
Euro area
China
04
Theme 4
Equities should continue embracing the soft landing narrative.
The constructive backdrop of solid growth, positive earnings and prospective rate cuts has been fueling market optimism. This mix should also support a broadening of the market rally as rate cuts come closer into sight.
Read more about this theme
05
Theme 5
Equities are embracing the soft landing/rate cuts combination.
The constructive backdrop of solid growth, positive earnings and prospective rate cuts is fueling market optimism. This mix should also support a broadening of the market rally as rate cuts come closer into sight.
Read more about this theme
06
Theme 6
With potential gains across asset classes, staying in cash is the main risk.
Assets in money market funds have ballooned to a record $6 trillion, with investors attracted by elevated yields. Now, this cash represents a potential tailwind to risk assets.
Read more about this theme
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Meet the Team
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Meet the Team
Coming Soon
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1. Recent consumer and labor market survey data suggests that the next policy move will be a cut, not a hike.
2. With just four FOMC meetings remaining in 2024 and inflation still above the Fed’s comfort zone, markets are unlikely to get more than two policy rate cuts this year.
3. While inflation is likely to decelerate, the economy’s underlying strength, geopolitical tensions and several structural drivers argue against a meaningful drop in inflation. This is shaping up to be a short and shallow cutting cycle.
Emerging markets
Futures Implied as of June 28, 2024
Nasdaq
S&P 500
Since
2020
Since
2023
Mag. 7
386%
176%
Nasdaq
98%
69%
S&P 500
69%
42%
Principal AM
Forecast
1. Recent consumer and labor market survey data suggest that the next policy move will be a cut, not a hike.
2. With just four FOMC meetings remaining in 2024 and inflation still above the Fed’s comfort zone, markets are unlikely to get more than two policy rate cuts this year.
3. While inflation is likely to decelerate, the economy’s underlying strength, geopolitical tensions and several structural drivers argue against a meaningful drop in inflation. This is shaping up to be a short and shallow cutting cycle.
Emerging markets
Futures Implied as of June 28, 2024
Principal AM forecast
Nasdaq
S&P 500
Seema's Key Takeaways
Seema's Key Takeaways, 3Q 2024
Hear why Seema Shah, Chief Global Strategist, believes a shift toward easier financial conditions positions investors for potential outperformance during the remainder of 2024.
3Q 2024
Global market perspectives
Seema's
Takeaways