Equity markets continued to advance higher this week, shrugging off some weak macro data in Europe and in
Japan. Cyclicals stayed in the lead, with Industrials, Tech and Energy the best performing sectors.
European equities have narrowed their gap with the US. MSCI World is up 16% since the low made at
end-December. Bears continue to argue that one can’t buy stocks until earnings and PMIs stop
deteriorating and our global equity strategists disagree with this view, and highlight the ’15 – ’16
episode where MSCI World bottomed 10 months ahead of earnings revisions turning positive. At key
inflection points over the last 20 years, equities tended to move significantly ahead of the earnings, by
7 months on average and rallying as much as 30% during this time. While equities did not tend to wait for
the earnings improvement to be obvious before recovering, the strategy team does expect a more favourable
EPS backdrop in the 2H of the year, on the back of better Chinese activity, higher commodity prices,
easier base effects and stronger topline growth. If this comes to pass, they believe that it would drive
the next leg of the current market rebound, as it will be seen as a fundamental confirmation of the
upmove that many investors are still holding out for. Q4 results are drawing to a close, and are not as
poor as investors initially feared. Post the raft of downgrades in Q4, US is showing a clear inflection
higher, in line with the pattern observed during previous quarters. Stock price reaction to earnings was
encouraging: many companies that missed estimates or lowered guidance were not penalized, and even
outright traded higher on the day.
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