September 2024
Market Pulse
Leveraging expertise from the MFS Market Insights team to provide timely perspectives on economic and market dynamics that are top of mind for clients.
AUTHORS
Benoit Anne
Managing Director
Investment Solutions Group
Jonathan Hubbard, CFA
Managing Director
Investment Solutions Group
Brad Rutan, CFA
Managing Director
Investment Solutions Group
KEY TAKEAWAYS
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Economy & Markets
Economy & Markets
| US GROWTH
Pressure easing housing concerns MFS PERSPECTIVE
- US housing starts have slowed to the lowest level in four years, reflecting some easing of demand, which could feed into lower inflation.
- High mortgage rates and pent-up demand led to one of the least affordable housing markets in decades.
| US CONSUMER
Real retail sales have been robust MFS PERSPECTIVE
- There are few signs in the macro data that US consumers are ready to hit the brakes.
- A resilient consumer is central to the soft-landing scenario.
- With the labor market cooling, it will be critical to continue monitoring spending behaviors.
| LABOR MARKET
Layoffs are down for a fourth straight month MFS PERSPECTIVE
- After years of over hiring, the technology sector has cut the most jobs, though year-to-date cuts are less than half the pace of a year ago.
- The top reason cited for layoffs was “cost-cutting,” followed by “economic conditions.”
- Interestingly, technology advances (including AI) were not mentioned in any announcements.
| LENDING CONDITIONS
The SLOOS now shows only a moderate tightening bias MFS PERSPECTIVE
- Fears of a credit crunch have virtually disappeared following a significant reduction in the tightening bias in the most recent Senior Loan Officer Opinion Survey (SLOOS).
- With the Fed getting ready to cut interest rates, lending conditions are about to become even more supportive.
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Asset Allocation
Asset Allocation
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
We are moving from a slight overweight in fixed income to a neutral position as a soft landing becomes our base case and earnings momentum remains strong.
MFS PERSPECTIVE
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2
3
4
As the Fed signals that the time for rate cuts has arrived, a solid jobs market and a strong consumer strengthens the case for a soft landing. In this scenario, stocks and bonds could both do well. A broad, global rate-cutting cycle is underway.
Earnings growth momentum remains strong. While valuations look stretched in pockets of US equities, earnings have been able to support higher multiples. We favor large value, which offers an attractive downside capture, valuation and dividend profile.
Duration remains attractive as a Fed easing cycle approaches. Assuming a soft landing, credit offers high all-in yields and low default risks. Spreads remain tight, so carry and lower rates are more likely to contribute to return than spread compression.
The equal-weighted S&P 500 is trading at a significant discount to the cap-weighted index, presenting attractive opportunities for active investors. International equities remain undervalued relative to both the cap-weighted S&P 500 and history.
Approach and methodology: The MFS Market Pulse provides an outlook over a 12 month investment horizon for major asset classes as well as considerations of the prevailing market conditions. Views are driven by both quantitative and qualitative inputs including, but are not limited to, macro-economic data, valuations, fundamentals and technical variables.
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Equity
US Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
- Equity market volatility spiked in early August but appears to have been more of a technical position unwinding rather than a reflection of an underlying fundamental issue.
- The US index remains highly concentrated, with a handful of mega-cap stocks continuing to drive performance. Approximately 37% of the S&P 500’s market cap is encapsulated by just 10 stocks, up from 19% a decade ago.
- There has been some market rotation away from the Mag 7 and into other market segments. Consumers staples, a recent laggard, was a top three performing sector over the past month.
MFS CONSIDERATIONS LARGE CAP - Earnings estimates remain strong, with projected growth of 11% this year and 14% next year.
- They have been able to defend their higher margins while lower leverage levels make them more defensive should the economy slow more than expected. However, pockets of overvaluation persist and early August brought selling to those parts of the market.
SMALL/MID CAP - Small caps have benefited from a sharp rotation due to expectations of a soft landing.
- While valuations look reasonable, headwinds remain in higher rates and the potential for a slowing economy.
- A further strengthening of the business cycle and evidence of an earnings recovery is needed to support a sustained positive view on small caps
GROWTH - Concentration (43% of the index in five stocks) and the AI theme continue to drive Russell 1000® Growth Index stocks.
- Momentum reversed in July and August after six months of driving performance in growth stocks.
- With high expectations reflected in multiples, investors may want to be increasingly discerning as earnings misses are likely to be punished.
VALUE - A recent rotation has resulted in strong performance in more value-oriented sectors such as utilities and consumer staples while expectations for falling rates have supported value more broadly.
- A soft-landing scenario would be supportive as rates ease but growth remains intact.
BLANK
International Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
DEVELOPED INTERNATIONAL EQUITY 
- Volatility in Japan surged in early August as investors abruptly adjusted to a new monetary regime. Japanese equities remain supported by ongoing structural reforms, accommodative BOJ policy, a weak yen and rising real wages.
- European equities remain solid with the EU GRANOLAS index, up 14% year to date, leading the charge.
M F S C O N S I D E R A T I O N S - International equities continue to trade at deep discounts to the US on a valuation basis.
- Europe’s slow but steady economic recovery could be more supportive of European equities going forward.
- Softer inflation readings and expectations of a Fed easing cycle has led to a weakening of the US dollar, which could be a tailwind for international equities.
BLANK
EMERGING MARKET EQUITY 
- Volatility spilled over from the Japanese equity selloff, but regional equities have recovered nearly as quickly. China’s economy continues to struggle under the weight of a deflating property sector and a sluggish consumer. China equities are just slightly above where they started the year.
- Indian equities continue to be one of the strongest performing markets year to date.
M F S C O N S I D E R A T I O N S - China is engaging in stimulus measures to spark consumption by issuing debt to fund car, bicycle and appliance trade-ins. A step in the right direction, it may be too small to meaningfully impact the economy.
- Geopolitical concerns will be center stage ahead of November’s US elections.
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Fixed Income
Fixed Income
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
DURATION 
- The soft landing scenario along with forthcoming rate cuts are supportive of long duration over a 12-month horizon.
- In the near term, there is a risk that market pricing may overstate the magnitude of future easing.
M F S C O N S I D E R A T I O N S - The yield curve is likely to steepen in time, which will help support the relative attractiveness of the long end.
MUNICIPALS
- Fundamentals, including state finances, remain robust and may help manage risk in the event of a growth shock.
- An expected decline in cash rates may be supportive of asset class inflows.
M F S C O N S I D E R A T I O N S - Longer duration and high-yield municipals look attractive on a relative basis given a supportive growth environment and the shape of the municipal yield curve.
SECURITIZED (MBS) 
- The outlook for agency MBS remains broadly positive in view of strong fundamentals.
- An anticipated decline in rate volatility is likely to be supportive in the period ahead, but the valuation backdrop is less compelling relative to its peers.
M F S C O N S I D E R A T I O N S - Agency MBS offer diversification and defensive benefits as well as attractive spreads over Treasuries.
BLANK
US INV-GRADE CORP 
- The macro remains positive, but fundamentals are no longer showing strength.
- While total yields remain attractive, support from potential rate cuts is needed for above-average future returns, especially given stretched spread valuation.
M F S C O N S I D E R A T I O N S - We have turned more cautious in the near term, mainly reflecting a more challenging spread valuation picture.
US HIGH YIELD
- Fundamentals remain robust, helped by historically low levels of leverage and strong earnings.
- Other positives include low projected default rates, attractive breakeven yield valuation and a supportive macro outlook.
M F S C O N S I D E R A T I O N S - The risk/reward is interesting given the historically high level of break-even yield.
- While spread valuation looks rich, we don’t foresee a catalyst for a major spread correction, but security selection remains key.
EMERGING MARKET DEBT
- Fundamentals remain broadly adequate, especially the growth outlook.
- Although uncertainty over the dollar’s direction has risen, a potential weakening could act as a catalyst.
M F S C O N S I D E R A T I O N S - While total yield valuation remains compelling, higher-rated country spreads are tight and EM remains exposed to global risks, including geopolitics.
- Given the challenging valuation backdrop, sovereign credit selection is paramount.
The Market Pulse leverages the firm’s intellectual capital to provide perspective on broad market dynamics that are top of mind for asset allocators. We celebrate the rich diversity of opinion within our investment team and are proud to have talented investors who may implement portfolio positions and express different or nuanced views to those contained here, which are aligned to their specific investment philosophy, risk budget and entrusted duty to allocate our client’s capital responsibly.
The views expressed herein are those of the MFS Investment Solutions Group within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at any time and should not be construed as MFS’ investment advice, as portfolio positioning, as securities recommendations, or as an indication of trading intent on behalf of MFS.
Index data source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
Frank Russell Company (“Russell”) is the source and owner of the Russell Index data contained or reflected in this material and all trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication.
“Standard & Poor’s®” and S&P “S&P®” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by MFS. The S&P 500® is a product of S&P Dow Jones Indices LLC, and has been licensed for use by MFS. MFS’ Products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates make any representation regarding the advisability of investing in such products. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith The views expressed are subject to change at any time.
These views should not be relied upon as investment advice, as portfolio positioning, as securities, recommendations or as an indication of trading intent on behalf of the advisor. No forecasts can be guaranteed.
Economy & Markets
| US GROWTH
| Pressure easing housing concerns |
MFS PERSPECTIVE
|
| US CONSUMER
| Real retail sales have been robust |
MFS PERSPECTIVE
|
| LABOR MARKET
| Layoffs are down for a fourth straight month |
MFS PERSPECTIVE
|
| LENDING CONDITIONS
| The SLOOS now shows only a moderate tightening bias |
MFS PERSPECTIVE
|
Asset Allocation
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
We are moving from a slight overweight in fixed income to a neutral position as a soft landing becomes our base case and earnings momentum remains strong.
MFS PERSPECTIVE
1 |
2 |
3 |
4 |
As the Fed signals that the time for rate cuts has arrived, a solid jobs market and a strong consumer strengthens the case for a soft landing. In this scenario, stocks and bonds could both do well. A broad, global rate-cutting cycle is underway. |
Earnings growth momentum remains strong. While valuations look stretched in pockets of US equities, earnings have been able to support higher multiples. We favor large value, which offers an attractive downside capture, valuation and dividend profile. |
Duration remains attractive as a Fed easing cycle approaches. Assuming a soft landing, credit offers high all-in yields and low default risks. Spreads remain tight, so carry and lower rates are more likely to contribute to return than spread compression. |
The equal-weighted S&P 500 is trading at a significant discount to the cap-weighted index, presenting attractive opportunities for active investors. International equities remain undervalued relative to both the cap-weighted S&P 500 and history. |
Approach and methodology: The MFS Market Pulse provides an outlook over a 12 month investment horizon for major asset classes as well as considerations of the prevailing market conditions. Views are driven by both quantitative and qualitative inputs including, but are not limited to, macro-economic data, valuations, fundamentals and technical variables.
US Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
|
| MFS CONSIDERATIONS |
| LARGE CAP |
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| SMALL/MID CAP |
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| GROWTH |
|
| VALUE |
|
BLANK
International Equity
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
| DEVELOPED INTERNATIONAL EQUITY |
- Volatility in Japan surged in early August as investors abruptly adjusted to a new monetary regime. Japanese equities remain supported by ongoing structural reforms, accommodative BOJ policy, a weak yen and rising real wages.
- European equities remain solid with the EU GRANOLAS index, up 14% year to date, leading the charge.
| M F S C O N S I D E R A T I O N S |
- International equities continue to trade at deep discounts to the US on a valuation basis.
- Europe’s slow but steady economic recovery could be more supportive of European equities going forward.
- Softer inflation readings and expectations of a Fed easing cycle has led to a weakening of the US dollar, which could be a tailwind for international equities.
BLANK
| EMERGING MARKET EQUITY |
- Volatility spilled over from the Japanese equity selloff, but regional equities have recovered nearly as quickly. China’s economy continues to struggle under the weight of a deflating property sector and a sluggish consumer. China equities are just slightly above where they started the year.
- Indian equities continue to be one of the strongest performing markets year to date.
| M F S C O N S I D E R A T I O N S |
- China is engaging in stimulus measures to spark consumption by issuing debt to fund car, bicycle and appliance trade-ins. A step in the right direction, it may be too small to meaningfully impact the economy.
- Geopolitical concerns will be center stage ahead of November’s US elections.
Fixed Income
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
| DURATION |
- The soft landing scenario along with forthcoming rate cuts are supportive of long duration over a 12-month horizon.
- In the near term, there is a risk that market pricing may overstate the magnitude of future easing.
| M F S C O N S I D E R A T I O N S |
- The yield curve is likely to steepen in time, which will help support the relative attractiveness of the long end.
| MUNICIPALS |
- Fundamentals, including state finances, remain robust and may help manage risk in the event of a growth shock.
- An expected decline in cash rates may be supportive of asset class inflows.
| M F S C O N S I D E R A T I O N S |
- Longer duration and high-yield municipals look attractive on a relative basis given a supportive growth environment and the shape of the municipal yield curve.
| SECURITIZED (MBS) |
- The outlook for agency MBS remains broadly positive in view of strong fundamentals.
- An anticipated decline in rate volatility is likely to be supportive in the period ahead, but the valuation backdrop is less compelling relative to its peers.
| M F S C O N S I D E R A T I O N S |
- Agency MBS offer diversification and defensive benefits as well as attractive spreads over Treasuries.
BLANK
| US INV-GRADE CORP |
- The macro remains positive, but fundamentals are no longer showing strength.
- While total yields remain attractive, support from potential rate cuts is needed for above-average future returns, especially given stretched spread valuation.
| M F S C O N S I D E R A T I O N S |
- We have turned more cautious in the near term, mainly reflecting a more challenging spread valuation picture.
| US HIGH YIELD |
- Fundamentals remain robust, helped by historically low levels of leverage and strong earnings.
- Other positives include low projected default rates, attractive breakeven yield valuation and a supportive macro outlook.
| M F S C O N S I D E R A T I O N S |
- The risk/reward is interesting given the historically high level of break-even yield.
- While spread valuation looks rich, we don’t foresee a catalyst for a major spread correction, but security selection remains key.
| EMERGING MARKET DEBT |
- Fundamentals remain broadly adequate, especially the growth outlook.
- Although uncertainty over the dollar’s direction has risen, a potential weakening could act as a catalyst.
| M F S C O N S I D E R A T I O N S |
- While total yield valuation remains compelling, higher-rated country spreads are tight and EM remains exposed to global risks, including geopolitics.
- Given the challenging valuation backdrop, sovereign credit selection is paramount.
The Market Pulse leverages the firm’s intellectual capital to provide perspective on broad market dynamics that are top of mind for asset allocators. We celebrate the rich diversity of opinion within our investment team and are proud to have talented investors who may implement portfolio positions and express different or nuanced views to those contained here, which are aligned to their specific investment philosophy, risk budget and entrusted duty to allocate our client’s capital responsibly.
The views expressed herein are those of the MFS Investment Solutions Group within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at any time and should not be construed as MFS’ investment advice, as portfolio positioning, as securities recommendations, or as an indication of trading intent on behalf of MFS.
Index data source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
Frank Russell Company (“Russell”) is the source and owner of the Russell Index data contained or reflected in this material and all trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication.
“Standard & Poor’s®” and S&P “S&P®” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by MFS. The S&P 500® is a product of S&P Dow Jones Indices LLC, and has been licensed for use by MFS. MFS’ Products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates make any representation regarding the advisability of investing in such products. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith The views expressed are subject to change at any time.
These views should not be relied upon as investment advice, as portfolio positioning, as securities, recommendations or as an indication of trading intent on behalf of the advisor. No forecasts can be guaranteed.
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