FireSide: Q3 Research roundup—Navigating market optimism

Our experts dive into their outlooks for macro and markets in the third quarter.

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July 10, 2024 | 35 minute read

Join Chief U.S. Economist Lara Rhame, Director of Investment Research Andrew Korz and Research Associate Alan Flannigan as they examine their outlooks for corporate credit, private equities, commercial real estate and key macroeconomic trends for Q3 2024.

They go in depth on the latest impacts of market concentration, stubborn inflation and more, with a look at the causes and potential implications of the optimism currently priced into markets.

Transcript excerpt

Lara Rhame: Welcome back to FireSide, a podcast from FS Investments. I’m Lara Rhame, Chief U.S. Economist here at FS, and buckle up, it’s our quarterly research roundtable. Today, I’m joined by Alan Flanagan, an associate on our team who’s written a lot about private equity, but today we’re here to discuss corporate credit markets. Alan, welcome.

Alan Flannigan: Yeah, thrilled to be here, Lara. Thank you.

Lara Rhame: And we’re also joined by my podcast partner, Andrew Korz, an executive director on our team and my partner in thought leadership. He really focuses on equity markets, commercial real estate, two asset classes, which are pricing in very different outcomes, but we’re going to get to all that. Because we do this every quarter, and it’s always one of my favorite episodes, we get to ham and egg after we’ve spent all this effort putting pen to paper, like I guess we did that in the olden days, and our Q3 outlooks are out, so it’s about highlighting our big themes and our key takeaways in the third quarter…

Andrew Korz: Not to cut you off Lara, but I think maybe we should do a little recap first of the the first half that was because we were somehow already at the midpoint of 2024.

Lara Rhame: I was going to say, we’re already at the midpoint. It is incredible. It’s alarming. I think it’s important to level set because so much has changed. When I think about the start of this year, growth expectations for the U.S. economy, GDP, the consensus estimate was 1. 3%. Today, that’s risen to 2. 4%. We had seven rate cuts priced into markets. Today, we’re fiercely debating one or two. I think that amazing swing that really 18 months ago when we were all looking for a recession.

I think that’s really fueled so much market optimism. And for me, what has stuck out and has not sort of neatly followed the Goldilocks script, has been that inflation piece, which we’ve recently gotten. The May CPI numbers looked great, but markets were fast to latch onto that and very fast to forget the fact that we’ve had five months of data where we’ve had a lot of upside surprises in inflation, and today inflation is really average.

Let’s talk about CPI first. It’s really average, like 3.3% since June of last year. Last time I checked, that’s far above the Fed’s 2% target. Core PCE deflator, arguably what they’re really sort of looking at, more like 2.8. But, again, that’s really only come down from 3% at the beginning of the year.

All that’s to say, inflation is sticky. I would argue it’s stuck. But either way, it just has not followed that neat path that the rest of our economy seems to have adhered to the soft landing.

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Alan Flannigan

Alan Flannigan, CIPM, CAIA

Associate, Investment Research

Andrew Korz, CFA

Executive Director, Investment Research

Lara Rhame

Chief U.S. Economist + Managing Director