Equities

Informe especial

US assets and the US dollar should remain resilient relative to global peers over the next 12 months as policy uncertainty, election risk, and geopolitical risk reach a climax. After that, investors should reassess their regional allocation.

We close our overweights to Energy and Aerospace & Defense. The macroeconomic backdrop is deteriorating for Energy. As for A&D, the good news is already priced in.

Generative AI-related rally resumed in May. Much of the recent market gains are down to excess liquidity that was begotten by the massive pandemic stimulus, creating a dichotomy between multiple economic challenges and exuberant markets. The Fed is unlikely to step in to prevent the bubble as it is currently more worried about the near-term downside for growth than financial stability.

Informe especial

Historically, the biggest driver of the small cap premium was “migration” i.e., a subset of small stocks earning extreme positive returns as they become large stocks. However, migration rates between small and large stocks have declined in the US. Small companies that would have grown to become successful large caps are either staying private, getting acquired by larger companies, or are entering public markets when they are already large caps. As a result, only the very worst companies are left in the small cap space. Investors should avoid a structural passive allocation to US small cap indices.

Informe especial

We recommend overweight in Pharma over a tactical and strategic investment horizon, as challenges, that have recently hampered the industry group’s performance, are dissipating. Likely election outcomes are positive for the industry, while major trends like generative AI applied to drug development and an aging population are long-term tailwinds.

Q1 Earnings and sales growth were strong, but the devil is in the details: Without the Magnificent Five, earnings growth for the index would have been negative. On a positive note, margins have stabilized, and earnings growth is expected to broaden into yearend. Companies are optimistic about the economy. Development of AI applications is in full swing, but few companies are monetizing them yet. Consumer spending is strong but is slowing. We reiterate our underweight of consumer sectors, and overweight of Software and Services as the “don’t fight AI” adage holds.

The broad market took a significant step backward in April, as market jitters gripped investors, stoking fears of higher for longer monetary policy. However, our roundtable investor poll has demonstrated that the majority remain constructive on equities, and have plenty of cash ready to be invested, which could prolong the rally. Economic data is deteriorating while inflation is stubborn. However, so far, bad news is good news as many believe that a “Fed put” is still on.

Informe especial

US equities generally appear to be overvalued compared to European ones for no reason other than being domiciled on US stock markets. They are also cheap relative to US equities with lower concentration risk, a good long-term buy.

Q1 earnings results of the largest US banks have demonstrated that the engine of recent growth in profitability, NII, has faltered as funding costs are rising fast. However, the resurgence in non-NII thanks to a revival in corporate activity has been a saving grace. Earnings growth appears to have bottomed, while valuations are attractive. To play up portfolio exposure to an upcoming surge in capital markets activity, and minimize exposure to declining profitability in traditional banking services, overweight Diversified Banks and Capital Markets, and underweight Regional Banks.

In this note, we preview the Q1-2024 earnings season, give our take on expectations and share what we will be watching.