• S&P500 made a new all-time high this week, crossing the 3000 mark. Despite some high-profile profit
warnings, global equities held ground, supported by the dovish comments from the Fed. At a sector level,
Cyclicals fared better than Defensives in the US, and drifted sideways in Europe. • Our Global
Equity strategists remain constructive on equities. In their view, Growth-Policy trade-off is much better
now than it was in 2018. The upcoming Q2 results are likely to be challenging, but they expect the market
to continue the up move in 2H, and make significant fresh all-time highs before the next US recession
strikes. At the same time, they are looking for an internal market rotation in 2H: 1) Value vs Growth –
They were unexcited by Value style for some time, but are now calling for a rebound in Value vs Growth.
They believe that for the sustained reversal of Value underperformance one needs to see bottoming out in
bond yields and in PMIs. It is encouraging that the US 10-year bond yield is holding above 2%, and a
number of recent macro indicators appear to suggest activity is bottoming out. 2) In the continent, they
were long Exporters since Jan ’18, but given the strong 25% outperformance the strategists swapped into
Domestic plays last month. Euro direction is one of the key considerations for the trade, and they expect
the Euro to firm up vs the USD in 2H. 3) In the UK, they stay long Exporters vs Domestic plays, as a
hedge against continued political uncertainty.
• Our US strategists raised their S&P 500 12-month price target to 3,200. They see further upside driven
by: (1) synchronized monetary easing globally; (2) expectation of a partial trade deal as elections in
the US approach; (3) intra-cycle profit recovery by year-end with negative revisions likely peaking
during 2Q reporting season; (4) attractive relative valuation (EY-BY Spread at ~340bp and negative
yielding debt balance has risen to ~$12 trillion); (5) average equity positioning (~50th %-tile) and
still negative investor sentiment; and (6) steady demand for equities as corporates continue to return
shareholder capital at near record pace (>$100b/month in buybacks and dividends). While their
underlying assumption is for a partial trade deal to materialize before year-end, this uncertainty
remains the single largest downside risk to their positive view.
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