Oil

Investors should overweight US assets and de-risk their portfolios in anticipation of a major increase in policy uncertainty and geopolitical risk surrounding the US election and its global ramifications.

Concerns about the global economy have shifted from sticky inflation to faltering growth. Tight monetary policy is finally starting to bite. We suggest increasing portfolio defensiveness.

The consensus soft-landing narrative is wrong. The US will fall into a recession in late 2024 or early 2025. We were tactically bullish on stocks most of last year, turned neutral earlier this year, and are going underweight today. We conservatively expect the S&P 500 to drop to 3750 during the coming recession.

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.

The death of the Iranian president reinforces our base case view of Middle Eastern instability and at least minor oil supply shocks. Rapid geopolitical developments in recent weeks are pointing to a new bout of global instability. The US is hobbled by its election. Conflicts with Russia, China, and Iran are all now escalating at the same time, at least marginally. Investors should reduce risk and shift to more defensive assets, markets, and sectors.

The stock market will suffer a setback from the weakening labor market and a rebound in US and global policy uncertainty.