Financials

GAI is a powerful force that will revolutionize the global economy and we are sold on this long-term investment theme. To partake in the upward momentum, we recommend a nuanced approach. The GAI infrastructure cohort is now overbought - there should be a better entry point. The models and applications companies and early adopters are less of a crowded trade and offer more opportunities.

Clients are increasingly more positive about the US economy, but there are no signs of exuberance. The rally could continue as the majority is not fully invested. Financial conditions have already eased, and the Fed is unlikely to surprise on the upside but will deliver a promised cut this summer. CRE is a still pain point of the US economy. We are not bearish, but after a fast and furious rally, markets are fragile.

The market narrative continues to be dominated by the Magnificent Six, which drove both market performance and strong Q4 earnings results. While all sectors and styles have recently turned green, the rally is still mostly narrow. Earnings growth appears to be strong, but outside of the Magnificent Six, many companies are struggling. The market appears expensive and overbought, but that is mostly down to the high valuations and the popularity of the Magnificent Six.

The odds of a “Minsky Moment” for the Chinese banking sector are low. They, however, will continue facing cyclical and structural headwinds, including a dismal asset quality and profit outlook. Bank stocks remain a value trap. Absolute-return investors should sell rebounds in Chinese bank stocks.

Reported earnings for Q4-2023 were rather underwhelming and prone to issues that we have identified over the past few months: Growth is concentrated in just a few sectors and companies, while the profitability of a broad swath of the equity market is under pressure from disinflation and sticky wages. Consumers are still spending, but less enthusiastically than before, while a switch from spending on services to spending on goods is in its very early innings. Downgrade Consumer Staples to neutral.

We created a sector selection scorecard based on performance of sectors under various macroeconomic regimes while taking into consideration revisions to expected earnings growth and valuations in a historical context. Our total sector selection scorecard suggests overweighting defensives such as Utilities, and Consumer Staples, and underweighting cyclicals such as Consumer Discretionary, Industrials, and Financials. Considering this analysis, we have adjusted our sector positioning accordingly.