“Our investment strategy process is moving away from ‘buy-the-dips’ toward ‘sell-the-rallies,’ though we still see low single-digit returns globally for 2016,” Andrew Pease, Russell Investments’ global head of investment strategy, said in a statement upon the firm’s release Wednesday of its updated second-quarter global market outlook.

“With downside risks for equity markets outweighing potential upside scenarios, we expect to maintain a cautious outlook until business conditions improve.”

Strategists at Russell see corporate profits and GDP growth in the U.S. weakening this year, according to their updated outlook.

At the same time, they see growth as likely to be strong enough for the Federal Reserve to raise interest rates twice, pushing up the 10-year U.S. treasury yield to 2.3% over the next 12 months.

U.S. equities, they said, are now likely to hold to low single-digit returns for 2016 rather than low-to-mid- single digits projected at the beginning of the year, owing to expensive valuations and deteriorating price momentum.

“We have an underweight preference for U.S. equities in global portfolios as lackluster earnings and rich valuations suppress total-return expectations to near-zero over the next 12 months,” Russell’s investment strategist for North America Paul Eitelman said in the statement.

“While we do see more prevalent downside risks for the U.S. following the first quarter of 2016, the lack of major imbalances in the U.S. economy makes a recession this year unlikely.”

In contrast, strategists see some reasonable valuations in eurozone equities, which are being helped by quantitative easing.

Nevertheless, they said, further QE announcements were not having a big influence on either the euro or the Japanese yen. As a result, they expected the U.S. dollar bull run to wind down this year.

Global Outlook

Russell said its strategists base their global outlook on valuation, business cycle and sentiment.

Strategists view equity markets’ retreat early in the first quarter as having improved value across developed markets, with the U.S. still the most expensive. European and Japanese equities are somewhat cheaper and those of emerging markets moderately inexpensive.

Russell analysts said the business cycle was becoming less supportive for equities, and was now neutral for U.S. equities in the face of the potential for further Fed tightening and risks to growth in earnings per share.

The cycle for Japan and Europe remains favorable, thanks to weak exchange rates, supportive monetary policy and the potential for risking profit margins.

Slowing growth, export weakness and deteriorating potential for EPS growth have turned the business cycle negative for emerging markets.

Regarding China, Russell strategists maintained their long-held belief that the economic downturn is headed for a “soft landing,” but in their updated outlook, they qualified this by acknowledging skeptics could be proven correct this year.

They noted that China’s economy at present is under duress, with actual growth over the past year likely much lower than the headline claim of 6.8%. The value of Chinese imports is rapidly contracting, and languishing exports are proving a major drag on the world’s second-largest economy.

The recently concluded National People’s Conference committed to a 6.5% to 7% GDP target —“brave,” Russell said, given the negative trade environment.

The strategists said sentiment overall was neutral across the major regions. Price momentum is negative in every region, which is a negative sentiment indicator. However, they saw a counterbalance to this negative momentum in contrarian indicators continue to suggest modestly oversold conditions.

Following are the strategists’ updated 2016 forecasts across global regions and asset classes, as of March 30: Asia/Pacific

  • Low absolute returns and high volatility from regional equities expected
  • Bonds in the region are at extremes of expensive valuation
  • Business cycle is a mixed bag

U.S.

  • Underweight preference for U.S. equities in global portfolios
  • Total returns near zero expected over next 12 months

Eurozone

  • Overweight preference for eurozone equities and return to overweight peripheral bonds
  • Despite worrisome slowing global growth and global earnings expectations, strong eurozone fundamentals carry the day — for now

Currency

  • USD exchange rate plateauing
  • Yen the top currency pick because of attractive valuation and defensive characteristics
  • A significant selloff in developing country currencies would be a buying opportunity

Fixed income

  • Outlook for government bonds still poor, but less negative as a result of the weakening business cycle

— Check out BRIC Funds With Local Managers Don’t Outperform on ThinkAdvisor.