Corporate
Today’s report recaps last week’s webcast and elaborates on its themes, delving into the empirical evidence underpinning our conviction that asset allocators should underweight equities sparingly and fleetingly. We remain tactically neutral and cyclically bearish.
In Section I, we argue that global investors have been lulled into a false sense of security concerning the resiliency of the US economy. Tight monetary policy means that something must change for a recession to be avoided, and developed market rates cuts will likely be too modest and come too late to save the day. Nimble investors or those highly sensitive to tracking error should not be underweight stocks over the coming 3-6 months. Over a 6-12 month time horizon, we continue to recommend that investors remain underweight global equities versus US$-hedged long-maturity developed market government bonds. Section II is a guest report written by Martin Barnes, BCA’s former Chief Economist. Martin revisits the idea of the Debt Supercycle and discusses how its true end may emerge in response to a fiscal crisis in the US over the coming few years.
Looking at economic activity, global monetary policy seems restrictive, however, the behavior of financial markets tells a different story. What gives?
Nonfinancial corporate balance sheets are generally in good shape, but there are signs of deterioration at the bottom-end of the credit spectrum. We present evidence showing that credit deterioration at the bottom-end of the credit spectrum has a habit of migrating upwards.
There is a path to a soft landing, but it is a narrow one. We estimate that there is only a 20% chance that the US will avoid a recession before the end of 2025. We are currently neutral on global equities, but expect to downgrade stocks to underweight during the summer.
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.