In the macro picture, the main bearish argument is that the US economy could continue to strength and re-ignite inflation, leading to a long Fed pause at the top or even another hike.
Fuelling that sentiment is the experience of 2022, where US equities — particularly tech — were beaten up on inflation fears. It’s easy to forget that shares of META fell 80% in that period.
Those declines have since been reversed but the episode has left a lasting impression on the macro landscape. I think that’s a mistake. A better episode to focus on is the past two months. The market went from pricing in 160 basis points in Fed cuts to just 81 bps today. Despite that, the Nasdaq has rallied nearly non-stop.
There is a Fed put in play that I believe can fuel risk appetite despite strong US economic data. The way I see it, if the US economy grows 3% this year, the Fed won’t cut. If it grows 1.5%, the Fed could cut 4-6 times.
Either one is a winning scenario: It’s a classic Fed put. That’s a dynamic I’ve been highlighting since October and my conviction is growing that it will lead to sustained strength in equities.
Where it will leave a dent is in FX.
There is a clear divergence shaping up between the US and every other advanced economy. Thirty-year fixed mortgages rates have immunized the US consumer against higher rates and extreme government spending is fuelling excess growth. Meanwhile the rest of the world is feeling the pain of higher rates and many places don’t have the financial capacity of the US.
Not only will the rate divergence with the US and the rest of the world open up in H2 of this year, I think it will expand. Now that depends on how well US economic data holds up but as it stands, the US outlook is better than almost anywhere else.