After navigating years of inflation scares and recession fears, the macroeconomic environment is showing signs of improvement. Inflation is moderating, growth indicators are strengthening, liquidity remains supportive, and geopolitical tensions are easing. A potent combination of conditions is potentially creating the most compelling Goldilocks phase for the market in over a decade.
Data supports this optimistic view, with inflation easing and stagflation fears receding. Policymakers are openly discussing the possibility that real interest rates are excessively tight, influenced not only by current interest rates but also by the Federal Reserve’s shrinking balance sheet. This balance sheet reduction, once a source of monetary accommodation, is now inherently restrictive and strengthens the argument for a shift in policy.
Forward-looking growth indicators are also positive, with service sector strength, rebounding manufacturing sentiment, and surprisingly strong employment data. The possibility of a soft or no-landing outcome now seems increasingly likely, with economic activity proving robust and aligned with target levels. This cycle is uniquely driven by supply-side dynamics, with US legislative reforms, tax cuts, and deregulation creating a substantial positive supply shock.
Against this backdrop, risk assets are thriving, supported by plentiful liquidity and improving earnings revisions. There is potential for further gains, especially if balance sheet shrinkage continues and prompts interest rate cuts. The transition from a defensive, rate-hiking environment to one characterised by growth re-acceleration and benign price pressures is creating a favourable environment for investors.
