Macro Risks Still Rule (Just Less Than Before)

Our US Equity strategists dove into macro’s explanatory power in driving sector returns and fundamentals. Using principal component analysis, they show that growth, inflation, and rate risk together account for nearly three-quarters of sector return variation.  

Macro risks also influence fundamentals. A small number of factors explain much of the cross-sector variation in revenue and earnings growth, mainly growth. Even so, macro’s influence has weakened over the past three years, as the share of sector return variation explained by macro drivers now sits near the bottom of its 35-year range. 

Long/short industry-group baskets linked to these macro drivers indicate that the market has turned more pessimistic on growth, which could present an opportunity if data firms. At the same time, the market’s inflation view has strengthened, a shift that may be harder to fade given rising oil prices.