Equities

Several signs have emerged that the “bad news is good news” rally has run its course. Despite deteriorating economic data, the Fed is expected to maintain its “higher for longer” stance, disappointing the market. A rate cut is likely is only in case of a severe downturn, but that will not offer support to equities, until earnings growth bottoms. We recommend shifting a portfolio toward a defensive stance, and away from cyclicals at this juncture. We downgrade Auto to an underweight, and Capital Goods and Energy Equipment and Services to an equal weight.

This week we are sending you a Style Chart Pack, which now includes a standalone macro section, as well as macro, fundamentals, valuations, technicals, and uses of cash charts for the S&P 500, Defensives vs. Cyclicals, Growth vs. Value, and Small vs. Large. In the front section of this publication, we will review recent equity performance, and attempt to answer real estate sector-related questions that are foremost in investors’ minds.

Monetary tightening has brought the vulnerabilities of the mid-size banks into the spotlight, and their peril will weigh on economic growth. Therefore, we favor defensives over cyclicals. We also downgrade Banks to underweight from neutral as the industry faces multiple headwinds, ranging from slowing demand for loans to regulatory scrutiny.

We recommend reducing allocation to Banks to underweight, selling into potential bounces. To do so, we put banks onto downgrade watch.

Special Report

Generative AI is a major technological breakthrough that holds tremendous economic and investment promise and will have sweeping effects on wide swaths of the economy. We are bullish on generative AI as a long-term investment theme. However, at the moment we observe hallmarks of an investment frenzy. We believe that there will be a more attractive entry point for patient investors.

The equity market is back to the 2019 level on an inflation-adjusted basis. However, it is still not cheap as it is not pricing in the possibility of a prolonged and deep earnings recession or a higher interest rates regime. Many areas of the market that appear cheap, are cheap for a reason. The only industries that are cheap because they are growing into their valuations are Energy and Airlines. We are upgrading Airlines to equal weight.

Special Report

Bulls and bears are perplexed because they suffer from recency bias. The investment roadmap and framework of the past 15 to 20 years should not be used to analyze current US financial markets. US corporate earnings will likely plunge substantially even in the case of a mild recession.

The US equity market is in the midst of an earnings contraction driven by slowing sales growth – a manifestation of the weakening economic demand and loss of corporate pricing power that accompany disinflation. The telecommunications industry is a defensive industry that faces many challenges: Low growth, cut-throat competition, and incessant demands for capital investment.

Macroeconomic and business conditions are gradually becoming more favorable for Tech as the bottoming of demand is in sight. Yet, we don’t believe that now is an attractive entry point - the good news is fully priced in, and technicals signal a pullback. However, the sector is worth monitoring as we are getting closer to a sustainable rebound. Our positioning remains unchanged.

Special Report

Markets are rallying because the end of the rate hiking cycle is in sight. We believe that eventually concerns about slowing growth will displace worries about the Fed and inflation, but for now, we are getting on board with the rally. We are upgrading Small to overweight and downgrading Large to underweight from neutral. Small is to benefit from rate stabilization, a rally in Treasurys, and a reset in earnings growth expectations. This is a tactical allocation as we are still cautious about overweighing US equities on a strategic basis.