We remain constructive on risk assets based on the strong fundamentals underpinning the market: robust global growth, reopening and recovery from the pandemic, strong fiscal and monetary policy stimulus, and a solid consumer setup that is expected to unleash pent-up demand. Recent market volatility has been largely driven by market rotation away from high-momentum stocks and expensive growth stocks, coupled with an adjustment in rates and inflation expectations, which should subside going forward.

1. Although economic progress has exceeded estimates, it remains uneven across regions. So far, the US has led the recovery alongside China, but this has only recently spread to Europe and will take even longer to reach emerging markets more broadly.
2. In the specific case of the US, both Treasury Secretary Janet Yellen and Fed Chair Jerome Powell want to keep their foot on the accelerator to achieve maximum inclusive and broad-based employment. In this regard, it is key to maintain support for asset purchases and low rates (accommodative financial conditions).
3. The recent debate has been dominated by the risk of inflation. Rising commodity prices, supply chain issues (such as semiconductors), declining global trade, and trade rigidities resulting from Covid restrictions (in addition to a base effect) are cited as reasons for rising inflation, many of which are characterized as "transitory."
4. In this regard, although it is expected that the Fed will consider beginning to reduce its QE in the coming months as the economic recovery consolidates, this process will be very gradual and, from then on, it may be many more months before interest rates rise. An early withdrawal of stimulus measures would be totally counterproductive today, both for employment targets and for the higher inflation that the Fed has been promoting.
5. The risks to recovery are another resurgence of the virus, which is unlikely given the progress of the vaccination process. A credit crisis in a highly leveraged world also appears to be a potential problem, but difficult to imagine given the liquidity of the economy. That liquidity is reinforced by the $4 trillion growth in the money supply.
6. Although the stock market is at historic highs, returns have expanded beyond a few technology stocks, meaning that market breadth has improved.

Is the market overvalued? Yes, but not as much as in other more speculative cycles, and stocks still offer a high yield relative to base rates. Otherwise, the visibility of corporate results has improved greatly, with a recovery in global earnings (MSCI World) that is expected to approach 40%.