Equities and multi-asset CIO update

Equities and multi-asset CIO update

Linda Bakhshian

  • Senior Managing Director, Deputy Chief Investment Officer – Equities & Multi-Asset
  • Read bio

First quarter 2024

Since the end of 2023, the US equity market has continued upwards despite persistent concerns of rising interest rates, inflationary pressures, and geopolitical tensions. For the first quarter, the cap-weighted S&P 500® reached an all-time high, with a gain of 11%, delivering its strongest first-quarter return since 2019. Zoom out further, and the past 12 months have rewarded investors with a staggering 30% return, although the gains were concentrated primarily in a few very large US names. However, market breadth did improve somewhat in the most recent quarter, as the equal weighted S&P 500 rose 7%. The quarter’s performance was again driven in large measure by themes related to artificial intelligence (AI), which has been a major source of optimism about future prospects for productivity and margins.

The stock market ultimately reflects the economic outlook and corporate earnings, both of which have been solid. However, multiple expansion once again drove a majority of the outperformance. During the quarter, the strongest‑performing sector was communication services (+16%), while the weakest was real estate (-1%). Cyclicals outperformed defensive stocks as economic data came in better than expected. Small-caps again lagged large-caps, partly due to consolidation after strong performance in the fourth quarter of 2023.

Most developed countries around the world have also delivered positive returns. In US-dollar terms, the strongest performer was the Nikkei in Japan, up 13% year to date, while the weakest was the Hang Seng in Hong Kong, down 3%. The standard benchmarks for Western Europe were all up in US-dollar terms, except for Switzerland, which was down 1%.

What we are watching:

Fundamentals remain constructive
  • Equal weight S&P 500 index valuation is reasonable relative to history, with underlying earnings growth driven by improving company revenues and margins, especially in the technology and communications sectors. Investors are increasingly concerned about S&P 500 index concentration, specifically in the AI related stocks.
  • Investor sentiment continues to be dominated by AI, glucagon-like peptide-1 (GLP-1) weight loss drugs, moderating input costs, and reshoring activity.
Macroeconomic data – the great moderation
  • Macroeconomic data points to mild slowing, particularly in the job market, while consumer balance sheets, and company earnings remain healthy.
  • US Federal Reserve may symbolically cut rates this year but is unlikely to act aggressively unless there is a sharp negative change in the economic data.
A world going to the ballot…
  • 2024 will be a landmark year, with ~50% of the world’s population going to the polls.
  • Investors will be paying close attention to elections in the European Union, India, the US, and the UK.

We believe investors’ confidence that central banks around the world will begin reducing interest rates this year continues to drive equity markets. Investors are encouraged by evidence that inflation is continuing to moderate in most countries, albeit at a slower pace than once hoped. Our economists and strategists believe that Europe may already be emerging from a mild recession, and that there is still a non-zero chance of a shallow recession in the US. On balance, though, our outlook remains cautiously optimistic for a soft landing.

Our investment teams are active across a wide range of asset classes, styles, and geographies. Almost all teams tend to favour companies that are higher “quality,” broadly defined as the ability to generate positive cash flow with reasonable consistency. We believe that over a market cycle, higher-quality stocks tend to deliver stronger and less volatile returns than lower-quality stocks. These companies usually have a differentiated and sustainable competitive advantage within their respective industry or sector, offering greater potential to deliver higher and more consistent margins in most macroeconomic environments.

We recently revisited our analysis of the long-term returns to cap-weighted quintiles of the Russell 3000® Index, based on cash flow returns relative to invested capital, which we believe is a strong marker for quality companies. The active returns to this factor demonstrate that, except for a few short periods, high quality has generally performed quite well through most macroeconomic environments. Furthermore, as we move through the business cycle, quality is one factor that has delivered higher returns consistently as growth becomes scarce and investors become more discerning.

Figure 1: Active total return to cash flow return on invested capital (Russell 3000 Index)

Active total return to cash flow return on invested capital chart

Source: Macquarie Asset Management, using data from FactSet, FTSE Russell, and Worldscope, April 2024. Graph shows cumulative cap-weighted return to Russell 3000 constituents, sorted into equal-weight quintiles by cash flow return on invested capital, with monthly rebalancing; details of methodology available on request.

We are currently favoring valuations and fundamentals within small-caps, emerging markets, developed markets ex-US, and higher-quality companies. We also continue to favor real asset exposure and believe positive secular trends such as the energy transition, digitalisation, and the onshoring and re-shoring of manufacturing are likely to continue to help outperform in the longer term.

Expert views from our network

Each quarter, we ask our investment analysts and portfolio managers for their views on issues they consider to be the most topical. During the first quarter, three of the most salient themes were AI, GLP-1s, and the commercial construction market. Here’s what our experts had to say about each topic.

Dave Reidinger, a US small-cap portfolio manager’s thoughts on AI:

It is not an exaggeration to argue that AI is the most significant technological leap of our generation. In June 2023, McKinsey suggested that AI, and the closely associated developments of machine learning, large language models, and natural language queries have the potential to add over 5% to global GDP and to improve productivity and margins by 25 to 50 basis points over the next several years.1 In January 2024, the International Monetary Fund estimated that over 40% of jobs will be significantly influenced by AI technologies and AI tools have the potential to free up nearly 60% of employees’ time today for more productive, creative, and fulfilling tasks.2

Like all previous technologies, however, adoption will not be a straight line. Hype cycles in the past instruct us that investors vastly overestimate the near-term effects of new technologies while significantly underestimating their long-term impacts. Our investment professionals are identifying industries and companies that will benefit from this emerging AI trend, while beginning to limit exposure to the sectors of the global economy most threatened by its adoption. Leveraging our analytical insights, we will take advantage of opportunities where the market has mispriced these growth, margin, and timing impacts.

Elizabeth Jones, a senior healthcare analyst’s thoughts about GLP-1s:

Over the past 12 to 24 months, investors in the healthcare sector have focused on the GLP-1 market, and we think for good reason. GLP-1 is a class of drugs which has been used to treat type 2 diabetes for over 15 years with ever-increasing penetration of the market due to improvements in the ease of delivery, potency, and side effect profile with second- and third-generation drug approvals. This class of drugs fill a high unmet need in the treatment of type 2 diabetes. In type 2 diabetes, patients have resistance to insulin and increasing weight is highly correlated with increasing insulin resistance.

Most of the drugs currently approved to treat type 2 diabetes result in weight gain; so those drugs do help control high blood sugars, but also worsen insulin resistance, creating a vicious cycle. Second- and third-generation GLP-1s do an excellent job of controlling blood sugars but also produce meaningful weight loss, enabling a virtuous cycle. This concept is extremely powerful and critical to understanding the market potential: most of the drugs we have historically used to treat type 2 diabetes make the underlying condition more challenging to treat, while GLP-1 drugs improve the underlying condition.

As the overall profile of the GLP-1 drugs has improved, the developers have sought additional indications including weight loss in the non-diabetic obese population. And the innovation in the GLP-1 category will continue to impress. Obesity may be the greatest health challenge facing the US population, with an estimated 110 million people in the US being candidates for an anti-obesity medication. The GLP-1 drugs, combined with collateral mechanisms of action, have the potential to dramatically improve the underlying health of this country over the next several decades. As a result, this area is likely to remain a key focus for investors and has the propensity to change the healthcare and insurance landscapes.

Mark Dennis, a senior financial analyst’s view on US regional banks:

US regional banks have been in the spotlight since March of 2023, when Silicon Valley Bank failed after a bank run. The deposit flight that followed cascaded to other banks, including Signature and First Republic. All told, banks with over $500 billion in assets failed in 2023.3 These failures, as well as declining margins and concerns about credit exposure, led to widely followed regional bank indices declining over 10% in 2023 versus a gain of over 23% for the S&P 500.

Concerns remain, most of which centre on commercial real estate (CRE) exposure at the regional banks. Compared to the larger banks, regional banks have much more exposure to CRE as an asset class and have had more than twice the growth in CRE over the past decade. Work-from-home trends precipitated by COVID-19 have persisted, decreasing the square footage needs of businesses in many downtowns. Add a historically rapid increase in interest rates, and many investors in office buildings are underwater, with refinancings coming due. Overbuilding of multifamily residences in certain geographies is causing similar problems.

We expect relative valuations for the group to remain low, absent a significant move lower in interest rates or a credit cycle that cleanses the troubled assets from the system.


Global central banks are considering rate cuts to cement their soft-landing scenario. While many investors seem euphoric, we think the investment environment will remain challenging, and that warrants an approach for identifying investment opportunities that can deliver solid outcomes even if the central banks don’t cut as deep as currently anticipated. To us, this is more aligned with quality-based investment approaches. Amid an uncertain economic backdrop, we continue to advocate for risk-based portfolio construction to ensure investors are prepared for several different possible outcomes.

Views at a glance

Views at a glance

Views are as of April 2024 and are subject to change without notice.

  1. McKinsey Digital, “The economic potential of generative AI: The next productivity frontier.” June 14, 2023.
  2. Kristalina Georgieva, International Monetary Fund blog, “AI Will Transform the Global Economy. Let’s Make Sure It Benefits Humanity.” January 14, 2024.
  3. FDIC, Bank Failures 2023 in Brief.


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Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

Large language models (LLM) are deep learning algorithms that can recognize, summarize, translate, predict, and generate content using very large databases.

Recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in gross domestic product (GDP) in two successive quarters.

The Russell 3000 Index measures the performance of the largest 3,000 US companies, representing approximately 98% of the investable US equity market.

The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value, and is often used to represent performance of the US stock market.

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