July 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
- Recent data suggest that the US economy is slowing modestly.
- This is a positive development as the alternative — a no-landing scenario — has been a threat to markets.
| 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.
- 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.
| ELECTIONS
Markets ignore elections on average MFS PERSPECTIVE
- There is little difference in either average return or volatility in election and non-election years.
- Presidential policies are just one of the numerous factors that can impact equity markets.
- Investors would be wise to temper concerns over election-induced volatility.
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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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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.
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 sell-off this 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
- The information technology sector continued to lead US equity markets higher this month, but breadth improved in recent weeks, with most sectors participating, closing the gap.
- Semiconductor stocks, while up significantly year to date, have taken a pause as price gains materially outpaced earnings growth.
- Second quarter earnings growth of 8.8% is forecast, with communication services and health care expected to show the highest growth rates, according to FactSet.
MFS CONSIDERATIONS LARGE CAP - Large-cap stocks are off their mid-June highs after technology stocks took a breather.
- S&P 500 profit margins remain strong, nearing 12%.
- Artificial intelligence remains a theme across sectors.
SMALL/MID CAP - A higher-for-longer rate environment weighs on small caps since they carry significantly more floating and/or short-term debt than large caps.
- The small-cap investment universe does not hold the same level of concentration risk as large caps.
GROWTH - Concentration remains high for the Russell 1000® growth index, with the top 5 names accounting for 43% of market cap.
- Some retailers have come under pressure as consumers trade down due to inflationary pressures.
VALUE - Valuations remain compelling with the Russell 1000® value trading at a 15.5x PE relative to the Russell 1000® growth’s 28x.
- Recent market broadening has been supportive of the energy and financial sectors.
BLANK
International Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
DEVELOPED INTERNATIONAL EQUITY 
- Snap elections in the UK and France have raised the risk of volatility across European asset classes in the near term.
- While the MSCI Japan Index moved sideways in June, it remains up 20% year to date.
M F S C O N S I D E R A T I O N S - While some of the valuation gap has closed, international equities continue to trade at a deep discount to US equities.
- A weakening dollar would likely be broadly supportive of international equities.
- Valuation for the MSCI EAFE Index is in line with the 10-year average of around 14.6 times forward earnings.
BLANK
EMERGING MARKET EQUITY 
- China equities have gained strength of late, although we remain cautious of broad-based exposure.
- Taiwan (18% of MSCI EM Index) has been a key driver of year-to-date performance, driven by a 78% technology weighting.
M F S C O N S I D E R A T I O N S - The Chinese government has rolled out a rescue fund to support financial institutions weighed down by failed property bets.
- Other pockets of Asia 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 
- 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.
The Market Pulse leverages the firm’s intellectual capital to provide perspective on broad market dynamics that are top of mind for asset allocators. We celebrate the rich diversity of opinion within our investment team and are proud to have talented investors who may implement portfolio positions and express different or nuanced views to those contained here, which are aligned to their specific investment philosophy, risk budget and entrusted duty to allocate our client’s capital responsibly.
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
|
| ELECTIONS
| Markets ignore elections on average |
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. |
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 sell-off this 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 |
- Snap elections in the UK and France have raised the risk of volatility across European asset classes in the near term.
- While the MSCI Japan Index moved sideways in June, it remains up 20% year to date.
| M F S C O N S I D E R A T I O N S |
- While some of the valuation gap has closed, international equities continue to trade at a deep discount to US equities.
- A weakening dollar would likely be broadly supportive of international equities.
- Valuation for the MSCI EAFE Index is in line with the 10-year average of around 14.6 times forward earnings.
BLANK
| EMERGING MARKET EQUITY |
- China equities have gained strength of late, although we remain cautious of broad-based exposure.
- Taiwan (18% of MSCI EM Index) has been a key driver of year-to-date performance, driven by a 78% technology weighting.
| M F S C O N S I D E R A T I O N S |
- The Chinese government has rolled out a rescue fund to support financial institutions weighed down by failed property bets.
- Other pockets of Asia have benefited from increased demand for semiconductor supply chain components as AI-related demand remains robust.
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.
The Market Pulse leverages the firm’s intellectual capital to provide perspective on broad market dynamics that are top of mind for asset allocators. We celebrate the rich diversity of opinion within our investment team and are proud to have talented investors who may implement portfolio positions and express different or nuanced views to those contained here, which are aligned to their specific investment philosophy, risk budget and entrusted duty to allocate our client’s capital responsibly.
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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