Equities

The most likely outcomes for the US elections are a “Red Sweep” and a “Blue Gridlock.” The following is a brief discussion of likely policies associated with each election outcome. We also present a post-election US Equities Cheat Sheet, in which we summarize winning trades for each scenario over the tactical investment horizon.

This week, we are sending you a sector chart pack. In the front section of this publication, we briefly review October's performance and then switch our attention to the earnings season and outlook for the Magnificent Seven.

Informe especial

Gen Z is coming of age and, as one of the largest cohorts in the US with significant buying power, wields increasing influence over consumer trends. The Gen Z investment thesis captures a host of nascent themes that reflect new generational preferences and spending patterns, such as fintech and online gaming, and a keen interest in investing and crypto, among others. Our Gen Z basket captures these investment themes, which are yet to go through their peak growth phase, and provides investors with an opportunity to profit from them over a long-term investment horizon.

Upgrade Auto & Components Industry Group from an underweight to an overweight as it is dominated by Tesla, whose outlook has brightened.

The semiconductor industry has decoupled: Demand for AI and advanced chips is booming, while the outlook for legacy and non-AI semiconductors is downbeat. We upgrade the US semiconductors to overweight on a tactical investment horizon as Nvidia’s good fortunes will drive the performance of the entire industry. We also reiterate overweight in Diversified Financials and Capital Markets as the resurgence in capital market activity is still in its early innings and will continue to drive the outperformance of the nation’s largest investment banks.

Earnings growth is expected to be strong enough to assuage investors' fears that recession is not yet imminent. Q3 earnings expectations have been revised downward over the past three months, and the bar for the beats has been lowered. Operating margins are also expected to expand.

It is too early to say that the US labor market has turned the corner. We assign a 60% chance that the US will enter a recession over the next 12 months, with the downturn likely to begin in the first half of 2025. Accordingly, investors should underweight equities.

Recent data releases and revisions indicate that the US economy is stronger than initially reported, reducing the odds of a recession. While we harbor concerns about the reliability of the data, for now, it appears that aggressive monetary easing is taking place against the backdrop of a strong economy. If that is indeed the case, the economy may overheat again. This warrants portfolio rebalancing away from sectors that offer downside protection in a downturn, such as Telecom and Utilities, to sectors that outperform in a no-landing scenario, such as Energy.

Informe especial

Underweight Real Estate over a tactical investment horizon. We expect economic growth to downshift, and even lower interest rates won’t benefit the sector in such conditions. Further, delinquency rates are rising and broadening across subsectors, which does not bode well for sector performance. The risk to our view, is that Real Estate will rally if the Fed succeeds in orchestrating a soft landing.

In this report, we follow up on the Roundtable that we hosted on September 11. We summarize the results of the client polls and answer a few questions on top of investors’ minds.