Markets are currently too optimistic, according to a survey by Natixis Investment Managers citing inflation and geopolitical risks as potential triggers to end the market rally.

Two-thirds of strategists across Natixis and its 11 affiliated investment managers believe that markets may be too optimistic, according to a survey by the French financial group.

«We have seen a strong start to the year with robust stock market performances, easing inflation and a resurgence of the bond market,» said Mabrouk Chetouane, head of global market strategy at Natixis Investment Managers.

«However, investors should be cautiously optimistic as they continue to face an array of headwinds in the second half of the year, led by politics, geopolitical tensions, potentially higher for longer rates, slower consumer spending, and elevated levels of government debt.»

Inflation Pressures

40 percent of respondents worry that surprise inflation could halt the market rally with just 7 percent expecting the Federal Reserve to reach its target by the end of the year. 

77 percent are concerned that rates will stay higher for longer. 37 percent expect two rate cuts by the Fed compared to 70 percent by the European Central Bank and 67 percent by the Bank of England. 

Geopolitical Risks

Geopolitics is also a major worry with 80 percent expecting related risks to act as a headwind in the second half of 2024. In fact, 47 percent think that geopolitical conflicts could potentially end the current market rally.

Domestic politics will also be in play, as 77 percent of respondents say that the US presidential election matters for markets with 74 percent seeing it as a cause for medium (37 percent) or high (37 percent) risk to investors. 60 percent believe it will more likely weigh on the market than support it. 47 percent also worry about the politicization of the Fed as it makes rate cut decisions.

Market Preference

In terms of market preference for equities, 67 percent project that the US will offer the best returns in the second half with 60 percent naming the IT sector as its top performer. On fixed income, core short government bonds, core long government bonds and investment grade corporates are expected to deliver the best returns in the US. Within Europe, developed market investment grade corporates are seen as having the top potential.

Alternatives were also highlighted as a driver of improved returns as 60 percent of strategists think that a portfolio made up of 60 percent equities, 20 percent fixed income and 20 percent alternatives will outperform the traditional 60/40 portfolio. 

The survey was conducted in June 2024 with responses from 30 market strategists, portfolio managers, research analysts and economists across the Natixis Group.