From Morningstar:

The driving force behind the December rally is still strong, with many investors anticipating rate cuts in 2024. Although markets are slightly overvalued, they are expected to continue to rise if momentum remains strong. European economic data, particularly in manufacturing, is weak, and the employment market could be sufficiently loose to support rising rates.

In the US, the economy is doing well, but a loosening labor market might nudge central bankers toward rate cuts. High investor sentiment contributed to historically high market levels, but returns might not be easily quantified. Current market opportunities are accessible in various sectors, such as consumer defensives or healthcare.

Despite economic weakness, 2023 saw both European and US indexes hit or come close to all-time highs. Now that we’ve entered 2024, investors will likely continue to put faith in the anticipated rate cuts. Owing to the difficulty in quantifying market values, it’s challenging to predict how far markets could go, but they are currently overvalued.

Americans could see a strong economy and labor markets work against central rate cut scenarios, while Europe’s weak economy may cause rate cuts to come too late. An overheating or recessionary economy in either Europe or the US could significantly impact equity markets, while the risks investors are looking past might change with more negative economic readings.

Although markets are moderately overvalued, there are significant disparities across various sectors. Sectors like consumer defensive and healthcare in Europe, and real estate or basic materials in the US, are trading below their fair value. Investors should take note of these defensive qualities and other potential opportunities across sectors as risks remain high.



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