Energy
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 stock market will suffer a setback from the weakening labor market and a rebound in US and global policy uncertainty.
Mexico’s election and the US election pose short-term and potentially medium-term risks to Mexican financial assets. But unless the ruling party wins a double supermajority, we remain structurally overweight Mexico relative to global stocks excluding the United States.
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.
Investors should prepare for economic data to weaken even as policy uncertainty and geopolitical risk skyrocket ahead of the US election.
Central banks are in a dilemma whether to prioritize supporting growth or bringing inflation back to target. This is unlikely to end well. Investors should be defensively positioned.
AI, EVs, and reshoring will lead to a massive surge in demand for electricity. Carbon-free, cheap, baseload nuclear energy stands to greatly benefit from these megatrends going forward.
The implication is that Israel chose not to escalate the risk of direct war with Iran. Hence we remain in our base-case “Minor War, Minor Oil Shock” scenario.