Navigating the Shifting Tides: US Equities Poised to Outshine Bonds in Q4

As the Federal Reserve continues to cut interest rates, a recent Bloomberg Markets Live Pulse survey reveals a growing optimism among investors, who believe that US stocks will outperform government and corporate bonds for the remainder of the year. This risk-on sentiment is further bolstered by the bullish calls emerging on Wall Street and the recent surge in China's stock market, driven by the government's economic stimulus measures.

Seizing the Opportunity: Investors Embrace Risk Assets and Emerging Markets

Bullish Bets on US Equities

The survey results indicate that a significant majority of the 499 respondents, 60% to be precise, expect US equities to deliver the best returns in the fourth quarter. This bullish outlook aligns with the broader sentiment on Wall Street, where the Fed's recent half-point rate cut and China's economic stimulus have fueled a renewed sense of optimism. Yung-Yu Ma, the chief investment officer at BMO Wealth Management, echoes this sentiment, stating that the firm has already been "leaning into risk assets and leaning into US equity," and would consider adding to these positions if there were a pullback.

Emerging Markets Gain Favor

Beyond the US, the survey also reveals a preference for emerging markets over developed markets, with 59% of respondents indicating their preference for the former. This shift in sentiment reflects the growing belief that the Fed's dovish stance and the potential for further rate cuts will create a favorable environment for emerging economies, which often benefit from lower borrowing costs and increased capital inflows.

Avoiding Traditional Safe Havens

As investors ramp up their bets on risk assets, they are also shying away from traditional safe-haven investments, such as Treasuries, the US dollar, and gold. The survey shows that 36% of respondents consider buying oil as the trade to avoid for the rest of the year, while 29% cite buying Treasuries as the least desirable option. This shift in sentiment underscores the growing confidence in the US economy's resilience and the belief that the Fed's actions will support the continued outperformance of equities.

Diverging Views on Fixed Income

Despite the overall bearish sentiment towards Treasuries, the survey also highlights the diverging views on the fixed-income market. While Treasuries are still on course to gain for the fifth straight month, investors remain wary of long-term Treasuries due to the risk of a resurgence in inflation as the Fed eases its monetary policy. This uncertainty is reflected in the survey, where respondents are divided on the pace and extent of the Fed's rate cuts, with 59% expecting quarter-point cuts and 34% anticipating steeper reductions.

Cautious Outlook on the US Dollar

The survey also reveals a cautious outlook on the US dollar, another traditional haven asset. Eighty percent of respondents expect the greenback to either remain roughly flat or decline by more than 1% by the end of the year. This sentiment aligns with the relatively muted performance of the Bloomberg Dollar Spot Index, which has gained less than 1% year-to-date.In conclusion, the Bloomberg Markets Live Pulse survey paints a picture of a risk-on environment, where investors are increasingly bullish on US equities and emerging markets, while shying away from traditional safe-haven assets. This shift in sentiment is driven by the Fed's dovish stance and the belief that the central bank's actions will create a favorable backdrop for the US economy and risk assets. As the fourth quarter approaches, investors will be closely watching the Fed's next moves and the continued performance of the markets.