May 2024
Market Pulse
Leveraging the expertise from the MFS Market Insights team to provide timely perspectives on economic and market dynamics that are top of mind for clients.
AUTHORS
Benoit Anne
Managing Director
Investment Solutions Group
Jonathan Hubbard, CFA
Managing Director
Investment Solutions Group
Brad Rutan, CFA
Managing Director
Investment Solutions Group
KEY TAKEAWAYS
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Economy & Markets
Economy & Markets
| GLOBAL GROWTH
Fears of a Global Recession Have Receded MFS PERSPECTIVE
- The growth outlook is recovering in many places, including the UK, the eurozone, Asia and Brazil.
- Stronger global growth tends to be supportive of risky assets, especially in non-dollar markets.
| INFLATION
Inflation Remains Too High MFS PERSPECTIVE
- While goods inflation is down significantly, services inflation is getting stuck.
- Wage growth and consumer demand for services are primary contributors.
- Fed cuts may be fewer and later than expected.
| IMMIGRATION
Net Immigration Driving Population and Economic Growth MFS PERSPECTIVE
- A surge of immigration has likely increased potential GDP, a measure of what the economy should be producing.
- Immigration trends could also explain discrepancies in labor and income data supporting a stronger economic backdrop.
| ELECTIONS
Election Years Do Not Dictate Fed Policy MFS PERSPECTIVE
- History suggests the Fed largely insensitive to the political calendar.
- The Fed has both eased and tightened in years when Republicans and Democrats have won. These cycles tend to be multi-year efforts driven by economic conditions.
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Asset Allocation
Asset Allocation
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
A more favorable economic backdrop suggests a move closer to a neutral portfolio positioning, with a slight bias toward fixed income due to the risk adjusted appeal.
MFS PERSPECTIVE
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The recent topline GDP print disappointed, but we believe the economy is still healthy, as evidenced by the strong services contribution in the last round of inflation data. This should keep the Fed on pause and is an overall positive for risk assets.
Given valuation risks in US equities, we maintain a slight underweight with a preference for large value, which offers an attractive downside capture, valuation and dividend profile.
Fixed income continues to offer meaningful yields across the risk spectrum and all-in yields drifted even higher due to the rate selloff this year. However, credit spread compression is unlikely to be a significant contributor to returns.
From a risk/reward perspective, there is a wider range of outcomes in equities versus fixed income. The worst-case outcome for fixed income would likely be if the Fed hikes, but the bar is high and the timeline extended for that to occur.
Approach and methodology: The MFS Market Pulse provides an outlook over a 12 month investment horizon for major asset classes as well as considerations of the prevailing market conditions. Views are driven by both quantitative and qualitative inputs including, but are not limited to, macro-economic data, valuations, fundamentals and technical variables.
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Equity
US Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
- US company earnings have been mixed so far, with aggregate expectations of 9% earnings growth for S&P 500 companies.
- Weaker than expected Q1 headline GDP and higher rates weighed on equities at the end of April, but underlying domestic economic activity remains resilient.
- Equity markets are beginning to digest the likelihood that Fed cuts will be fewer and later than expected given inflationary pressures and strong labor markets.
MFS CONSIDERATIONS LARGE CAP - Large technology companies reported solid earnings and revenue growth.
- Despite some price correction, pockets of tech look rich.
SMALL/MID CAP - Small and midcaps are under pressure from higher rates.
- Small caps carry significantly more floating and/or short-term debt versus than large caps.
- Relative valuations are beginning to look compelling for small versus large caps.
GROWTH - The excitement and activity around AI bolstered cloud revenue growth for technology companies.
- Technology is more than 53% of the Russell 1000® Growth Index, up from 45% a year ago, so concentration risk in passive is growing.
VALUE - Bank earnings were mixed, with investment banking and trading firms faring the best.
- Utilities companies are showing strength on strong demand as economic activity remains high.
BLANK
International Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
DEVELOPED INTERNATIONAL EQUITY 
- Japan equities have remained strong performers, rising double digits to date. A weak yen remains a tailwind to exports.
- Developed international equities have begun to show momentum, with 11 European stocks leading the way.
M F S C O N S I D E R A T I O N S - The European stocks faring best include luxury goods makers as well as pharmaceutical manufacturers, which are benefiting from the growth in GLP-1 drugs.
- Strength in Japan equities have been the biggest driver of gains. Japan remains the largest country weight in the MSCI EAFE index at more than 23%. In March, Japan abandoned its negative interest rate policy.
BLANK
EMERGING MARKET EQUITY 
- Emerging market equities continue to trade sideways, although there are significant pockets of opportunity for security selection across countries.
- Despite a bounce off its January lows, Chinese equities continue to be a drag on the overall EM market
M F S C O N S I D E R A T I O N S - India’s economy, as well as its stock market, have been on a steady growth trajectory over the past three years as it benefits from changing global trade flows and a growing domestic consumer base.
- Other pockets of Asia, including Taiwan, have benefited from increased demand for semiconductor supply chain components as AI-related demand remains robust.
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Fixed Income
Fixed Income
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
UST/DURATION 
- The macro-fundamentals and the potential for rate cuts are supportive of long duration, but the disinflation process is less smooth than anticipated, creating more uncertainty over the timing and magnitude of policy easing.
M F S C O N S I D E R A T I O N S - The yield curve is likely to steepen in time, which will help support the relative attractiveness of the long end.
MUNICIPALS
- Municipals’ fundamentals, including state finances, remain robust and may provide some protection in the event of a growth shock.
- The expected decline in cash rates may be supportive of inflows back into the asset class this year.
M F S C O N S I D E R A T I O N S - Longer duration and high-yield municipals look attractive on a relative basis given a supportive growth environment and shape of the municipal yield curve.
SECURITIZED (MBS)
- Prospects for agency MBS appear robust in view of strong fundamentals and a potential recovery of the housing sector.
- An expected decline in rate volatility is also likely to be supportive in the period ahead.
M F S C O N S I D E R A T I O N S - Agency MBS offer diversification and defensive benefits as well as attractive spreads over treasuries.
BLANK
US INV-GRADE CORP 
- The US macro backdrop remains supportive, but asset class fundamentals have weakened.
- While total yields remain fairly attractive, support from potential rate cuts is needed for future returns to be above average, especially given the spread valuation.
M F S C O N S I D E R A T I O N S - We have turned more cautious toward US IG in the near term, reflecting eroding fundamentals and a more challenging spread valuation backdrop.
US HIGH YIELD 
- US HY fundamentals remain resilient, helped mainly by low levels of leverage by historical standards and strong earnings.
- Other positive factors include low default rate projections, healthy breakeven yields, and an upgraded macro outlook.
M F S C O N S I D E R A T I O N S - The risk/reward is fairly attractive for investors with a high-risk tolerance who may consider deploying credit risk exposure.
- While we are not concerned about the maturity wall, spread valuation looks stretched, so security selection is key.
EMERGING MARKET DEBT
- EMD fundamentals continue to be adequate, especially on the growth front.
- A potential weakening of the US dollar may also act as a supportive driver, although uncertainty over the dollar outlook has risen.
M F S C O N S I D E R A T I O N S - EMD valuation is now less compelling than a few months ago, but total yields remain attractive.
- EMD remains an interesting asset class, but given the more challenging valuation backdrop, robust sovereign credit selection is paramount.
Index data source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
Frank Russell Company (“Russell”) is the source and owner of the Russell Index data contained or reflected in this material and all trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication.
“Standard & Poor’s®” and S&P “S&P®” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by MFS. The S&P 500® is a product of S&P Dow Jones Indices LLC, and has been licensed for use by MFS. MFS’ Products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates make any representation regarding the advisability of investing in such products. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith The views expressed are subject to change at any time.
These views should not be relied upon as investment advice, as portfolio positioning, as securities, recommendations or as an indication of trading intent on behalf of the advisor. No forecasts can be guaranteed.
- The macro-fundamentals and the potential for rate cuts are supportive of long duration, but the disinflation process is less smooth than anticipated, creating more uncertainty over the timing and magnitude of policy easing.
Economy & Markets
| GLOBAL GROWTH
| Fears of a Global Recession Have Receded |
MFS PERSPECTIVE
|
| INFLATION
| Inflation Remains Too High |
MFS PERSPECTIVE
|
| IMMIGRATION
| Net Immigration Driving Population and Economic Growth |
MFS PERSPECTIVE
|
| ELECTIONS
| Election Years Do Not Dictate Fed Policy |
MFS PERSPECTIVE
|
Asset Allocation
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
A more favorable economic backdrop suggests a move closer to a neutral portfolio positioning, with a slight bias toward fixed income due to the risk adjusted appeal.
MFS PERSPECTIVE
1 |
2 |
3 |
4 |
The recent topline GDP print disappointed, but we believe the economy is still healthy, as evidenced by the strong services contribution in the last round of inflation data. This should keep the Fed on pause and is an overall positive for risk assets. |
Given valuation risks in US equities, we maintain a slight underweight with a preference for large value, which offers an attractive downside capture, valuation and dividend profile. |
Fixed income continues to offer meaningful yields across the risk spectrum and all-in yields drifted even higher due to the rate selloff this year. However, credit spread compression is unlikely to be a significant contributor to returns. |
From a risk/reward perspective, there is a wider range of outcomes in equities versus fixed income. The worst-case outcome for fixed income would likely be if the Fed hikes, but the bar is high and the timeline extended for that to occur. |
Approach and methodology: The MFS Market Pulse provides an outlook over a 12 month investment horizon for major asset classes as well as considerations of the prevailing market conditions. Views are driven by both quantitative and qualitative inputs including, but are not limited to, macro-economic data, valuations, fundamentals and technical variables.
US Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
|
| MFS CONSIDERATIONS |
| LARGE CAP |
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| SMALL/MID CAP |
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| GROWTH |
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| VALUE |
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BLANK
International Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
| DEVELOPED INTERNATIONAL EQUITY |
- Japan equities have remained strong performers, rising double digits to date. A weak yen remains a tailwind to exports.
- Developed international equities have begun to show momentum, with 11 European stocks leading the way.
| M F S C O N S I D E R A T I O N S |
- The European stocks faring best include luxury goods makers as well as pharmaceutical manufacturers, which are benefiting from the growth in GLP-1 drugs.
- Strength in Japan equities have been the biggest driver of gains. Japan remains the largest country weight in the MSCI EAFE index at more than 23%. In March, Japan abandoned its negative interest rate policy.
BLANK
| EMERGING MARKET EQUITY |
- Emerging market equities continue to trade sideways, although there are significant pockets of opportunity for security selection across countries.
- Despite a bounce off its January lows, Chinese equities continue to be a drag on the overall EM market
| M F S C O N S I D E R A T I O N S |
- India’s economy, as well as its stock market, have been on a steady growth trajectory over the past three years as it benefits from changing global trade flows and a growing domestic consumer base.
- Other pockets of Asia, including Taiwan, have benefited from increased demand for semiconductor supply chain components as AI-related demand remains robust.
Fixed Income
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
| UST/DURATION |
- The macro-fundamentals and the potential for rate cuts are supportive of long duration, but the disinflation process is less smooth than anticipated, creating more uncertainty over the timing and magnitude of policy easing.
| M F S C O N S I D E R A T I O N S |
- The yield curve is likely to steepen in time, which will help support the relative attractiveness of the long end.
| MUNICIPALS |
- Municipals’ fundamentals, including state finances, remain robust and may provide some protection in the event of a growth shock.
- The expected decline in cash rates may be supportive of inflows back into the asset class this year.
| M F S C O N S I D E R A T I O N S |
- Longer duration and high-yield municipals look attractive on a relative basis given a supportive growth environment and shape of the municipal yield curve.
| SECURITIZED (MBS) |
- Prospects for agency MBS appear robust in view of strong fundamentals and a potential recovery of the housing sector.
- An expected decline in rate volatility is also likely to be supportive in the period ahead.
| M F S C O N S I D E R A T I O N S |
- Agency MBS offer diversification and defensive benefits as well as attractive spreads over treasuries.
BLANK
| US INV-GRADE CORP |
- The US macro backdrop remains supportive, but asset class fundamentals have weakened.
- While total yields remain fairly attractive, support from potential rate cuts is needed for future returns to be above average, especially given the spread valuation.
| M F S C O N S I D E R A T I O N S |
- We have turned more cautious toward US IG in the near term, reflecting eroding fundamentals and a more challenging spread valuation backdrop.
| US HIGH YIELD |
- US HY fundamentals remain resilient, helped mainly by low levels of leverage by historical standards and strong earnings.
- Other positive factors include low default rate projections, healthy breakeven yields, and an upgraded macro outlook.
| M F S C O N S I D E R A T I O N S |
- The risk/reward is fairly attractive for investors with a high-risk tolerance who may consider deploying credit risk exposure.
- While we are not concerned about the maturity wall, spread valuation looks stretched, so security selection is key.
| EMERGING MARKET DEBT |
- EMD fundamentals continue to be adequate, especially on the growth front.
- A potential weakening of the US dollar may also act as a supportive driver, although uncertainty over the dollar outlook has risen.
| M F S C O N S I D E R A T I O N S |
- EMD valuation is now less compelling than a few months ago, but total yields remain attractive.
- EMD remains an interesting asset class, but given the more challenging valuation backdrop, robust sovereign credit selection is paramount.
Index data source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
Frank Russell Company (“Russell”) is the source and owner of the Russell Index data contained or reflected in this material and all trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication.
“Standard & Poor’s®” and S&P “S&P®” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by MFS. The S&P 500® is a product of S&P Dow Jones Indices LLC, and has been licensed for use by MFS. MFS’ Products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates make any representation regarding the advisability of investing in such products. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith The views expressed are subject to change at any time.
These views should not be relied upon as investment advice, as portfolio positioning, as securities, recommendations or as an indication of trading intent on behalf of the advisor. No forecasts can be guaranteed.
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