Contrary to expectations at the start of the year, US stock markets have delivered strong returns in 2023.

Investor sentiment has also swung from extreme pessimism in October 2022, when markets had corrected sharply, to extreme bullishness in July 2023. 

Headline economic data supports this change in mood.

GDP data reflects an economy that has been growing on-trend for at least 4 quarters. Meanwhile, CPI has declined steadily and appears to be on track to meet the Fed’s target. And this has been achieved without an uptick in unemployment, which continues to hover around 50-year lows.

Zooming out, the facts are a bit more troubling.

U.S. debt was downgraded for the second time in history by Fitch, citing long-term governance challenges. 

Moody’s downgraded the credit ratings of several banks and put the ratings of several others on standby for reviews, due to ongoing challenges in that sector. 

Industrial data continues to show deterioration.

Corporate earnings beat expectations, but mainly because the latter were steadily guided lower.  Actual revenues were in fact lower in comparison to the previous year by a wide margin.

Valuations look expensive from a historical perspective by most metrics.

And the Federal Reserve has repeatedly announced its intent to keep interest rates ‘higher for longer’.

We remain underweight U.S. equities. 

On the other side of the globe, China has disappointed with its post-pandemic recovery and is clearly dealing with some structural challenges. 

In these rather cloudy skies, emerging markets including the GCC offer potential bright spots. Not having given in to the financial profligacy of their Developed Market peers, and buoyed by lower debt and better demographics, they look poised for a strong future.