Equities
Macro, fundamental, and quantitative analysis translated into actionable equity views across sectors, factors, themes, and baskets.
Mid-caps are the best of both worlds and are an excellent strategic overweight thanks to their size premium, but also better financial quality and higher dividend yield than Small. We are bullish on Mid near term and believe that this may be a great trade. We will initiate a position in the S&P 400 as a tactical overweight but will monitor it very closely.
After a prolonged slump, there are early signs that demand for chips has bottomed and is showing signs of life. Meanwhile, corporate demand for future GAI chips is still a significant industry tailwind. In line with our call for an overweight of the Magnificent Seven, upgrade Semis to equal weight from underweight on a tactical basis. Longer-term outlook is neutral to negative as we expect the economy to slow in 2024, while growth expectations may be too high.
Q3 earnings commentary has been broadly positive, despite intensifying macro headwinds. Going forward, a negative growth outlook and geopolitical risks, are a threat to buoyant earnings expectations. We project that earnings growth for 2024 will move lower than currently projected - a negative for equities. This Santa Claus rally is unlikely to be the start of a new bull market.
The Vicious Troika remains a long-term threat, but over the short term, rates will likely have another leg down on growth concerns, offering support to equities, which are now fairly valued and are no longer overbought. Longer-term outlook remains negative. The Magnificent Seven will likely lead a tactical rebound. Overweight Growth vs Value and FSemis.
In this insight we suggest two ways clients can use Equity Analyzer to navigate the evolving crisis in the Middle East. The first minimizes commodity exposure and the second uses relies on the BCA Score to add exposure to high quality Energy and Aerospace and Defense stocks.
Q3-2023 is expected to mark the end of the earnings recession for the past three quarters, opening the door to positive earnings growth. Whether that would be sustainable or will sputter once the recession settles in as expected in 2024 remains to be seen. However, much of earnings growth is already priced in.
The market has been held hostage by surging rates. Zombie companies are “alive” and are multiplying – they are highly sensitive to surging borrowing costs. Underweight Utilities to reduce portfolio duration. Maintain neutral positioning of Basic Materials but take a granular approach to allocations within the sector.
Downside risks to equities are building. Rates, the dollar, and energy prices will remain elevated into yearend. This trifecta makes a soft landing less likely than before and hurts corporate profits and multiples. However, high cash balances may offer downside protection against a sharp correction.