With the S&P 500 Index continuing to reach one record close after another, investors are celebrating. We’ve seemingly avoided a global recession while achieving disinflation.

But before buying more Nvidia stock and popping the Champagne, consider this: The S&P 500 reaching 5000—and then moving even higher—is not particularly meaningful as a stand-alone number. Its true importance lies in understanding what the market is pricing in at that level. Moreover, as we near the end of the first quarter, where will the equity market go and what else will the year bring?

Here’s what the inaugural Global Investment Management Survey conducted by the Franklin Templeton Institute is telling us:

• The U.S. Federal Reserve has managed to engineer a soft landing.

• Corporate earnings won’t be as positive as widely expected.

• There are worthwhile opportunities available, but investors need to look further than the S&P 500.

No Recession In 2024
Geopolitics and lower-than-expected corporate earnings are still concerns, but fear of recession is no longer at the top of the list. We should see U.S. real gross domestic product (GDP) economic growth of 1.6%, which is roughly in line with the 1.5% expectations from the International Monetary Fund (IMF), 1.4% from the Fed and 1.3% consensus from Bloomberg.

Survey respondents believe the Fed will deliver four interest rate cuts this year, in line with the four cuts predicted by the futures market and one more than the three cuts projected by the Fed’s latest “dot plot.”

And inflation, as measured by U.S. core personal consumption expenditures (PCE), will moderate and finish the year around 2.7%. This is lower than the latest reading of 2.9% but higher than estimates from the Fed and the Bloomberg consensus of 2.4% and 2.6%, respectively.

Corporate Earnings Will Likely Be Below Consensus Estimates
The survey predicts the S&P 500 will end the year at 4744, essentially flat from where it began the year. It’s currently trading at 21x forward earnings, compared to the historical average of roughly 17x forward earnings. With assets already pricing in recent good news (such as jobs data), and the expectation of more good news to come (including rate cuts), overall stock valuations are stretched. Simply put, they’re overvalued.

It’s not surprising that survey respondents are forecasting below-consensus earnings growth of 5.8% versus expectations of 11.8%. It’s a good time to be an active manager when idiosyncratic factors, rather than macro factors, are expected to drive returns.

Focus On Quality Companies With Strong Financials
It’s clear that current valuations don’t leave much room for multiple expansion so investors should focus on relative growth and look beyond the concentrated benchmarks. And rather than amassing a heavy concentration in artificial intelligence-oriented companies, find the sectors, names and regions that are currently unloved.

Those include high-quality businesses with market-leading competitive positions and strong financials with the ability to invest and grow through a range of economic conditions. Historically, investing in companies with higher return on equity has led to better performance in periods after the Fed starts cutting interest rates.

In general, value stocks will outperform relative to growth ones this year, while small cap stocks will outperform large caps and U.S. and emerging markets will outperform non-U.S. developed markets. Sectors that should benefit from these conditions include technology (excluding the Magnificent Seven) as well as healthcare, industrials and financials.

We believe fixed income will favor investment grade debt due to its high credit quality as default rates for high-yield debt continue to tick higher toward their historical average. Two-year Treasury yields will likely decline meaningfully while 10-year yields are expected to move only modestly lower. In particular, municipal bonds will continue to be a high quality, diversifying investment option that offers attractive tax-free yields.

The survey is a starting point for financial advisors and institutional investors to formulate their own views on the economy, equities, fixed income and alternative investments. Its next update, around mid-year, will provide another comprehensive global view on the dimensions that matter most.

About The Survey
The Global Investment Management Survey encompasses the views of 300 senior Franklin Templeton investment professionals from different teams around the world with unique knowledge, processes and perspectives. The respondents cover public and private equity, public and private debt, real estate, digital assets, hedge funds and secondary private market investments. The complete survey results can be found here.

Stephen Dover is chief market strategist and head of the Franklin Templeton Institute.