Mid-Year Outlook: Our Unloved Bull Market in Equities

This year’s bull market in equities is underappreciated by investors. From mid-January to mid-June, it has in fact been narrow, dominated by technology stocks. As we predicted in the beginning, generative AI has been an exciting theme that has reawakened growth expectations and risk-tolerance, driving performance not just in companies directly connected to AI, but to growth more broadly. From the bull market’s bottom last October, performance has in fact been much more broad-based. The cycle of large-cap and growth outperforming small-cap and value has likely about run its course now. A slowdown in lending presents the first real threat to our long-standing no-landing scenario. But banks continue to have the confidence of savers, seen in the transition from overnight deposits to more risky time deposits. The Fed is likely done with rate hikes, as inflation continues to collapse. As inflation attains the Fed’s targets over the summer, the bull market will move forward. But disinflation will turn into deflation, and a pessimistic narrative about it will drive an intense correction.