Global equities are holding near all-time highs, with US equities outperforming other regions this week.
At the sector and style level, we saw a clear rotation out of Growth and into Value this week, as bond
yields moved higher despite the dovish comments from Fed chair Powell. Energy sector outperformed in both
Europe and in the US. Oil prices moved higher and dollar weakened. Our Global Equity strategists remain
constructive on the equity outlook, still seeing material upside over the next 12 months. They expect
these returns to be supported by both a resumption of earnings growth and some P/E rerating. The P/E
premium to last 5-year average levels is currently nearly 20% lower than what was typically seen at past
market peaks. While the consensus view is that multiples can only go lower, they think there is a
potential for the market to start to price in that the Fed will end up too dovish for the remainder of
the current cycle. Real assets are likely to rerate due to much lower late cycle Fed rate, bond yields
and inflation rates than typical. In addition, P/Es are positively correlated to EPS momentum, which they
think will rebound in the 2H of this year. They highlight that the current setup has similarities to the
'15-'16 mid-cycle episode, where the earnings rebound started becoming evident in the 2H ’16. While Q2 is
still likely to be poor, they believe the earnings momentum will pick up again into the end of this year.
Earnings typically didn’t peak for the cycle until they strongly overshot the trend line. Regionally,
they keep a preference for the US, and have recently upgraded Japanese equities. They have been OW Growth
over Value in the past year, but are now calling for a rotation out of Growth and into Value style in 2H,
with Banks and Energy-Commodities expected to lead.
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