August 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
| US GROWTH
Converging to the growth sweet spot MFS PERSPECTIVE
- While US economic growth remains solid, modest slowing increases our confidence in a soft-landing scenario.
- While US economic growth picked up in Q2, H1 2024 growth was meaningfully slower than H2 2023.
| US CONSUMER
Credit availability is at a 20-year high MFS PERSPECTIVE
- Credit limits have risen faster than card balances.
- Record untapped purchasing power will provide a safety net for many, although at a price.
- Shelter delinquencies have been rising but are concentrated among lower-income renters.
| US EQUITY
Equity profits expected to broaden MFS PERSPECTIVE
- While the largest stocks have had significant profit growth in recent quarters, the current pace seems unlikely to persist.
- Estimates are for a broadening of profit growth but at a lower rate.
- Imminent rate cut expectations have driven a sharp rotation to small caps and rate-sensitive sectors.
| INTERNATIONAL EQUITY
International equity markets have kept pace with the US MFS PERSPECTIVE
- Since the start of the recent bull run, international markets have broadly kept pace with the S&P 500 and outperformed the index excluding the top seven stocks.
- A broadening focus beyond the mega-cap tech and AI themes should be supportive of international markets.
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Asset Allocation
Asset Allocation
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
While US equities are seeing some welcome broadening, we maintain a slight bias toward fixed income due to its risk-adjusted appeal.
MFS PERSPECTIVE
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As long as economic data and Fedspeak continue to point to eventual rate cuts, equities remain supported, but the US election, Mag 7 decoupling and valuation risks keep us cautious regarding incremental allocations, particularly to large-cap US growth equities.
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. Real estate, financial services and industrials have been among the strongest sectors over the past month.
Fixed income continues to offer meaningful yields across the risk spectrum and all-in yields drifted even higher due to the rate sell-off earlier in the year. However, credit spread compression is unlikely to be a significant contributor to returns.
The primary scenario that would change our fixed income views would be a reversal in the disinflationary and economic-slowing trends. Fed hikes with minimal spread tightening would lower expected returns.
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
- Markets have seen a strong rotation to value and rate-sensitive sectors as expectations for lower rates are coupled with solid economic growth.
- The US index remains highly concentrated, with a handful of mega-cap stocks continuing to drive index performance. Approximately 37% of the S&P 500’s market cap is encapsulated by just 10 stocks, up from 19% a decade ago.
- Consumers staples continue to lag the broader index as higher prices weigh on lower-income consumers. .
MFS CONSIDERATIONS LARGE CAP - Expectations for large cap-earnings remain strong, with projected growth of 11% this year and 14% next year.
- Large caps have been able to defend their higher margins while lower leverage levels make them more defensive should the economy slow more than expected. However, pockets of overvaluation persist.
SMALL/MID CAP - Small caps have benefited from a sharp rotation due to expectations of a soft landing.
- While valuations look reasonable, higher rates and the potential for a slowing economy remain headwinds.
- Investors with a longer-term time frame could benefit from small/mid cap exposure, but any deterioration of economic or fundamentals conditions could weigh on near-term performance.
GROWTH - Concentration (43% of the index in five stocks) and the AI theme continue to drive Russell 1000® Growth Index stocks.
- Momentum reversed in July after six months of driving performance in growth stocks.
- With high expectations reflected in multiples, investors may want to be increasingly discerning as earnings misses are likely to be punished.
VALUE - Expectations of falling rates have supported value-oriented sectors, including financial services, real estate and industrials.
- A soft-landing scenario would be supportive of value as rates ease, but growth remains intact.
BLANK
International Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
DEVELOPED INTERNATIONAL EQUITY 
- Expectations of falling rates have supported value-oriented sectors, including financial services, real estate and industrials.
- A soft-landing scenario would be supportive of value as rates ease, but growth remains intact.
M F S C O N S I D E R A T I O N S - International equities continue to trade at deep discounts to US equities on a valuation basis.
- Europe’s slow but steady economic recovery could be more supportive of European equities going forward.
- The end of deflation and a recovering consumer should support Japanese consumption growth.
- An easing Fed cycle could see some weakening of the US dollar.
BLANK
EMERGING MARKET EQUITY 
- There is increasing bifurcation as emerging economies continue to diverge.
- China’s economy continues to struggle under the weight of a deflating property sector and a sluggish consumer.
- Indian equities continue to be one of the strongest performing EM markets to date.
M F S C O N S I D E R A T I O N S - In late July, amid flagging consumer demand, China’s politburo turned its focus toward increasing consumption after the Third Plenum disappointed equity markets. The People’s Bank of China took several easing steps in late July to counteract slowing economic growth.
- Geopolitical concerns will be center stage ahead of November’s US elections.
- A weaker US dollar would be supportive for earnings for emerging markets equities.
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Fixed Income
Fixed Income
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
UST/DURATION 
- A soft landing and potential future rate cuts are supportive of long duration, but uncertainty remains 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
- Fundamentals, including state finances, remain robust and may help manage risk in the event of a growth shock.
- An expected decline in cash rates may be supportive of asset class inflows.
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 the 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 anticipated decline in rate volatility is also likely to be supportive in the period ahead, even though technicals appear challenging.
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 macro remains positive, but fundamentals are no longer showing strength.
- While total yields remain attractive, support from potential rate cuts is needed for above-average future returns, especially given stretched spread valuation.
M F S C O N S I D E R A T I O N S - We have turned more cautious in the near term, mainly reflecting a more challenging spread valuation picture.
US HIGH YIELD 
- Fundamentals remain satisfactory, helped by historically low levels of leverage and strong earnings.
- Other positive factors include low default rate projections, healthy breakeven yield valuation and a supportive macro outlook.
M F S C O N S I D E R A T I O N S - The risk/reward is interesting given the attractive break-even yield.
- While we are not concerned about the maturity wall, spread valuation looks stretched, so security selection is key.
EMERGING MARKET DEBT
- Fundamentals remain broadly adequate, especially the growth outlook.
- Although uncertainty over the dollar’s direction has risen, a potential weakening could act as a catalyst.
M F S C O N S I D E R A T I O N S - While total return valuation remains compelling, spreads are tight, and EM remains exposed to global risks ranging from monetary policy uncertainty to geopolitics.
- Given the challenging valuation backdrop, sovereign credit selection is paramount.
The views expressed herein are those of the MFS Investment Solutions Group within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at any time and should not be construed as MFS’ investment advice, as portfolio positioning, as securities recommendations, or as an indication of trading intent on behalf of MFS.
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.
- A soft landing and potential future rate cuts are supportive of long duration, but uncertainty remains over the timing and magnitude of policy easing.
Economy & Markets
| US GROWTH
| Converging to the growth sweet spot |
MFS PERSPECTIVE
|
| US CONSUMER
| Credit availability is at a 20-year high |
MFS PERSPECTIVE
|
| US EQUITY
| Equity profits expected to broaden |
MFS PERSPECTIVE
|
| INTERNATIONAL EQUITY
| International equity markets have kept pace with the US |
MFS PERSPECTIVE
|
Asset Allocation
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
While US equities are seeing some welcome broadening, we maintain a slight bias toward fixed income due to its risk-adjusted appeal.
MFS PERSPECTIVE
1 |
2 |
3 |
4 |
As long as economic data and Fedspeak continue to point to eventual rate cuts, equities remain supported, but the US election, Mag 7 decoupling and valuation risks keep us cautious regarding incremental allocations, particularly to large-cap US growth equities. |
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. Real estate, financial services and industrials have been among the strongest sectors over the past month. |
Fixed income continues to offer meaningful yields across the risk spectrum and all-in yields drifted even higher due to the rate sell-off earlier in the year. However, credit spread compression is unlikely to be a significant contributor to returns. |
The primary scenario that would change our fixed income views would be a reversal in the disinflationary and economic-slowing trends. Fed hikes with minimal spread tightening would lower expected returns. |
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 |
- Expectations of falling rates have supported value-oriented sectors, including financial services, real estate and industrials.
- A soft-landing scenario would be supportive of value as rates ease, but growth remains intact.
| M F S C O N S I D E R A T I O N S |
- International equities continue to trade at deep discounts to US equities on a valuation basis.
- Europe’s slow but steady economic recovery could be more supportive of European equities going forward.
- The end of deflation and a recovering consumer should support Japanese consumption growth.
- An easing Fed cycle could see some weakening of the US dollar.
BLANK
| EMERGING MARKET EQUITY |
- There is increasing bifurcation as emerging economies continue to diverge.
- China’s economy continues to struggle under the weight of a deflating property sector and a sluggish consumer.
- Indian equities continue to be one of the strongest performing EM markets to date.
| M F S C O N S I D E R A T I O N S |
- In late July, amid flagging consumer demand, China’s politburo turned its focus toward increasing consumption after the Third Plenum disappointed equity markets. The People’s Bank of China took several easing steps in late July to counteract slowing economic growth.
- Geopolitical concerns will be center stage ahead of November’s US elections.
- A weaker US dollar would be supportive for earnings for emerging markets equities.
Fixed Income
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
| UST/DURATION |
- A soft landing and potential future rate cuts are supportive of long duration, but uncertainty remains 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 |
- Fundamentals, including state finances, remain robust and may help manage risk in the event of a growth shock.
- An expected decline in cash rates may be supportive of asset class inflows.
| 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 the 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 anticipated decline in rate volatility is also likely to be supportive in the period ahead, even though technicals appear challenging.
| 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 macro remains positive, but fundamentals are no longer showing strength.
- While total yields remain attractive, support from potential rate cuts is needed for above-average future returns, especially given stretched spread valuation.
| M F S C O N S I D E R A T I O N S |
- We have turned more cautious in the near term, mainly reflecting a more challenging spread valuation picture.
| US HIGH YIELD |
- Fundamentals remain satisfactory, helped by historically low levels of leverage and strong earnings.
- Other positive factors include low default rate projections, healthy breakeven yield valuation and a supportive macro outlook.
| M F S C O N S I D E R A T I O N S |
- The risk/reward is interesting given the attractive break-even yield.
- While we are not concerned about the maturity wall, spread valuation looks stretched, so security selection is key.
| EMERGING MARKET DEBT |
- Fundamentals remain broadly adequate, especially the growth outlook.
- Although uncertainty over the dollar’s direction has risen, a potential weakening could act as a catalyst.
| M F S C O N S I D E R A T I O N S |
- While total return valuation remains compelling, spreads are tight, and EM remains exposed to global risks ranging from monetary policy uncertainty to geopolitics.
- Given the challenging valuation backdrop, sovereign credit selection is paramount.
The views expressed herein are those of the MFS Investment Solutions Group within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at any time and should not be construed as MFS’ investment advice, as portfolio positioning, as securities recommendations, or as an indication of trading intent on behalf of MFS.
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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