Q3 2024 observations on the equity market

  • Real interest rates are starting to hurt, particularly in the US where inflation is starting to fall but rates remain restrictive
  • Cutting rates is difficult for now as US fiscal stimulus remains incredibly high, preventing inflation from normalizing
  • The Fed will be too late to cut if fiscal stimulus falls post the US election, with debt to GDP already very high
  • US consumer has remained resilient thanks to wealth effects but that virtuous cycle could reverse if asset prices start falling
  • Valuations remain high in the US but positioning is extended thanks to an unbroken belief in AI

Positive real rates only since mid/late 2023, effect is moderate in Europe but will start to hurt in the US

Line graph depicting positive real interest rates since mid/late 2023
Source: FactSet, Dallas Fed; Board of Governors as at 30 April 2024.

This line graph illustrates the trend of positive real interest rates from mid/late 2023 through April 2024. The horizontal axis represents time, with data points spanning from 2010 to April 30, 2024. The vertical axis denotes the magnitude of positive real interest rates in percentage terms.

Unprecedented fiscal stimulus in the US

Public Construction Spending1 Seasonally-Adjusted Annual Rates 2002 Through April 2024

Line chart depicting seasonally-adjusted annual rates of public construction spending from 2002 through April 2024
Source: U.S. Census Bureau, National Bureau of Economic Research, Empirical Research Partners Analysis. 1 Power, highway and streets, sewage and waste disposal, water supply, conservation and development as at June 2024.

This bar chart displays the seasonally-adjusted annual rates of public construction spending in the United States from the year 2002 to April 2024. The horizontal axis shows the years from 2002 to 2024, with major increments every two to three years labeled. The vertical axis represents the amount of spending in billions of dollars, with labels at appropriate intervals to indicate the scale of expenditure.

Computer, Electronic and Electrical Equipment Annualized Construction Spending 2022 Through April 2024

Line chart depicting annual rates of computer, electronic and electronical equipment construction spending from 2002 through June 2024
Source: U.S. Census Bureau, National Bureau of Economic Research, Empirical Research Partners Analysis as at June 2024.

This line chart displays the annual rates of electronical construction spending in the United States from the year 2002 to April 2024. The horizontal axis shows the years from 2002 to 2024, with major increments every two years labeled. The vertical axis represents the amount of spending in billions of dollars, with labels at appropriate intervals to indicate the scale of expenditure.

US Debt to GDP is a significant burden

Gross Federal Debt as Percent of Gross Domestic Product

Source: OMB, St. Louis Fed as at June 2024.

This line chart displays the gross federal debt as a percent of gross domestic product (annual, not seasonally adjusted). The horizontal axis shows the years from 1939 to 2024, with major increments every ten years labeled. The vertical axis represents the ratio of debt as percent of GDP, with labels at appropriate intervals to indicate the scale.

US household net worth matters

US household net worth matters

US household balance sheets
Source: FactSet, as at 29 March 2024.

This line chart displays the nominal USD value of US households. The horizontal axis shows the years from 2000 to 2024, with major increments every two years labeled. The vertical axis represents the nominal USD figure, with labels at appropriate intervals to indicate the scale.

Consumption seems overextended

Spending is unusually high relative to income

Personal saving rate (SA, %)
Source: BEA, Haver, ÃÛ¶¹ÊÓƵ as at 28 June 2024. Pandemic peak cut off in chart to preserve scale, peak of saving rate was 32% in April 2020

This line chart displays the personal savings rate of US households. The horizontal axis shows the years from 1985 to 2024, with major increments every 16 years labeled. The vertical axis represents the personal saving rate (%), with labels at appropriate intervals to indicate the scale.

US household financial asset allocation

US household financial asset allocation
Source: Federal Reserve, Goldman Sachs Global Investment Research as at 20 March 2024.

This line chart displays the financial asset allocation of US households. The horizontal axis shows the years from 1960 to 2024, with major increments every ten years labeled. The vertical axis represents the weight of each asset class (%), with labels at appropriate intervals to indicate the scale.

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