The Big Picture: 2024 Capital Markets Industry Outlook

Investors largely waiting for clarity on rates in 2024

The outlook for capital markets has stabilized in recent months after experiencing considerable turmoil during the liquidity crunch that US banks faced earlier in 2023.

Issuance activity has been relatively healthy in the debt markets, where credit spreads have tightened even as interest rates have increased notably over the last 18 months. Global equity issuance, however, has been far more depressed. While there are some signs of life from the downtrodden IPO market, investors remain hesitant to support many new equity issuances given concerns over economic stability.

Global economic growth has proven more resilient than first anticipated heading into 2023 in both advanced and emerging market economies. US banking sector upheaval has given way to relative stability and robust macroeconomic data, supporting the Federal Reserve’s aggressive monetary policy tightening to curb inflation. But investors are still waiting to see how economies and markets digest a higher-for-longer interest rate environment and whether central banks, particularly the Fed, require further action to temper inflation before becoming more supportive of new deal activity.

Looking ahead to the 2024 industry outlook for capital markets

Resurgent IPO activity in the third quarter offers some hope for a rebound in 2024 capital markets activity, but continued increases in long-term rates resulting in a bear-steepening of the US yield curve have cemented that interest rates are likely to remain higher for longer. Bear steepening of the yield curve occurs when long-term rates rise more quickly than short-term rates and the phenomenon often precedes a recession. Increased capital costs could limit risk appetite. Rising geopolitical tensions in the Middle East following the Oct. 7 Hamas attacks on Israel and Israel's subsequent declaration of war could lead to more caution as well.

The US economy, home to the largest capital markets in the world, remains on strong footing as evidenced by a robust September 2023 jobs report and the Atlanta Fed’s GDP now, which forecasts nearly 5% growth in the third quarter of 2023. If economic strength persists in the face of uncertainty and the Fed can end its tightening cycle soon, animal spirits in the capital markets could grow, leading to a resurgence in the outlook for issuance activity in 2024.