Wells Fargo Investment Institute (WFII) released its “2024 Midyear Outlook: Approaching the Economy’s Pivot Point,” which explores WFII’s belief that the pivot to positive momentum at the start of 2024 was driven by the combined forces of artificial intelligence, anticipated Federal Reserve (Fed) rate cuts, declining inflation, and the resumption of durable earnings growth. WFII strategists remain confident that five key points will likely continue to chart the market’s path forward over the next 18 months.

1. Inflation — Consumer Price Index inflation has decreased from a high of 9.1% in June 2022 to a range of 3% – 4%. The U.S. economy is slowing this year and should further cool inflation and prompt Fed rate cuts. As we look out 18 months, our base case calls for inflation to drift mildly lower but struggle to land the Fed’s 2.0% to 2.5% target.
2. Interest rates — Coming into this year, markets anticipated as many as five or six interest rate cuts. Now at midyear, the market has shifted expectations and anticipates fewer 2024 Fed rate cuts and projects continued higher interest rates.
3. Liquidity — In the first half, we saw the effect of government stimulus packages and a ballooning federal budget deficit on asset prices as large amounts of liquidity were pumped into the economic engine. That led to all-time highs in the S&P 500 Index, Japan’s Nikkei 225 Index, Germany’s DAX Index, bitcoin, and gold. Even strong issuance of U.S. Treasuries and U.S. investment-grade corporate bonds was met with robust demand as liquidity actively searched for a home across all asset classes.
4. Earnings — Equity prices generally reflect expectations for future earnings growth, and there is the potential for more broad-based growth going forward. We expect earnings growth to support additional gains over the next 18 months for the major U.S. equity benchmark indices.
5. Global landscape — Possibly the greatest potential for a market-moving pivot comes on the world stage. The war in the Middle East has escalated, and the war in Ukraine continues. Also, slowing growth in China has been a headwind for emerging market equities, and the U.S. dollar has remained stronger for longer than most expected.

“As we recalibrate our outlook for the back half of 2024, our guidance remains focused on high-quality investments in both equities and fixed income,” said Darrell Cronk, chief investment officer for Wells Fargo Wealth & Investment Management. “Quality investments have performed well — and we expect that will continue — as geopolitical risks, market volatility, and November elections will have much to say about the path for markets in the second half of the year.”

Highlights of WFII’s forecast include:

• The anticipated U.S. GDP (gross domestic product) growth target for 2024 year-end is 2.5%, and 2.1% for 2025.
• The target for U.S. consumer price inflation in 2024 and 2025 is 3%.
• The S&P 500 Index price target range is 5,100 – 5,300 for year-end 2024 and 5,600 – 5,800 for 2025.
• Two interest rate cuts are anticipated later this year and one again in 2025. The Federal funds rate forecast for 2024 is 4.75% – 5.00% and 4.50% – 4.75% in 2025.

The full report provides guidance for investors to help navigate the next 18 months, economic and market forecasts, where WFII sees opportunity, and five portfolio ideas. Also included are insights about equities, fixed income, real assets, and alternative investments. Please see the full report for detailed information.