The Healthy Skepticism in the IMF’s Upgraded Forecast

Here is the thing about economic forecasts: They change as conditions do, rising and falling as the humans who make them incorporate the latest happenings. Case in point, the IMF just boosted its full-year global GDP growth forecast a hair from 3.1% to 3.2%, calling the world “surprisingly resilient” in the face of rate hikes. But it was also one of the more begrudging revisions we have ever seen, droning on and on about inflation, debt, protectionism and other supposed negatives whose chickens will supposedly come home to roost eventually. To us, this is backward-looking confirmation of the economic improvement stocks have been pricing in this year, colored with the skepticism that lingers in the marketplace.

We often make the point that forecasts are priced in by the time they become public, and this is why. Markets incorporate all widely known information, including past economic data and opinions about said data and their implications. Forecasts, by their very nature, are an amalgamation of these past data and opinions about them. The IMF’s latest is a tour de force in this.

The April update starts by acknowledging things went better than expected as central banks hiked rates, with markets responding positively and US GDP even accelerating—a big contributor to the upward revision. Then it bends over backward to explain why this happened, citing US household savings and “changes in mortgage and housing markets over the prepandemic decade of low interest rates that moderated the near-term impact of policy rate hikes.”^[i] But lest folks get totally optimistic, it then spends dozens of pages arguing growth is mostly a figment of immigration—with per-capita GDP weaker, particularly in the UK—while rising protectionism, debt, red tape and weakness in Emerging Markets limit the world’s medium-term prospects.

These are the same concerns that have dominated headlines for months (in some cases years), just repackaged. The wrapping—a slightly brighter forecast—is new. The contents—stale data and old fears—aren’t.

Don’t get us wrong. It is nice to see the global economy’s resilience getting a little more love, to the extent that is happening here. That is a burgeoning sentiment trend, and it is consistent with the recent rise in market breadth (the percentage of companies outperforming the broad market’s aggregate return). A reaccelerating economy, on the heels of recession expectations, is consistent with broader bull market participation and a shift to more cyclical categories. We saw this late in Q1, with value-heavy Energy, Financials and Industrials outperforming alongside the large-growth heavyweights in Tech, Communication Services and Consumer Discretionary. The upgraded forecast and acknowledgement that things actually went pretty ok after rate hikes is a nice rubber-stamp of what markets have been pricing in.

We also find the skeptical overtones encouraging, warmed-over as the subject matter may be. Absent something big and bad that wallops them prematurely, bull markets generally end in euphoria, when investors have run out of worries. It isn’t that hot sentiment itself is bearish, but that worry-free investors are more prone to overlook deteriorating fundamentals, raising the likelihood of negative surprises. Sentiment warmed considerably during stocks’ banner Q1, with surveys of professional and individual investors registering more bullishness and commentary taking on a sunnier tone. But cheer isn’t universal or remotely outlandish, and the IMF’s forecast shows there is still a sizable element of disbelief in the world’s prospects. That suggests expectations are probably still too low, baking in some positive surprise power.

Statements like this can be hard to take in when markets are volatile as they have been lately. But that is how markets work. As Ben Graham observed, they act like voting machines in the short term, swinging on sentiment. But over the medium to longer term, they calmly and rationally weigh fundamentals and their likely impact on corporate earnings over the next 3 – 30 months. The recent negativity seems like the former: markets’ registering people’s feelings. The IMF’s forecast illustrates the latter: the positive surprise power available for markets to weigh when they get back to their day job. When exactly that will happen, no one can know. Volatility is always unpredictable, coming and going suddenly. But whenever fundamentals regain primacy, there should be plenty of good to keep tipping the scales in stocks’ favor.