Fynsa
The resilience of the global expansion appears to have continued in August, albeit with more divergence across sectors and regions.
In recent months, economic data in the U.S. has been surprisingly - on the whole - downward, while consumers are showing some signs of fatigue (retail sales, consumer confidence, automobiles and credit card delinquencies, to name a few). (retail sales, consumer confidence, auto and credit card delinquencies, to name a few). On top of this, payroll growth has slowed more than expected, but with inflation above the Federal Reserve's (Fed) target. The logic that "bad economic data is good data for the market" seems rather questionable to us.
Rather, we may be be approaching the point where "bad data will be bad" for risk assets, with a potentially weakening economy.with a potentially weakening economy. Inflation, meanwhile, could remain stable and above the Fed's target.
Indeed, we have begun to see more volatility in the markets, we have started to see more volatility in the markets and interest rates have been falling more sharply in the last few weekswith the treasury 10-year Treasury trading at levels around 3.7%. The slope of the curve no longer trades inverted..
The Federal Reserve would begin cutting interest rates in September and the market is debating between 25 bps or 50 bps.. By the end of 2024, 100 bps of cuts are implied and 250 bps by 2025. We doubt they will materialize unless the economy is already in recession.
With a market more tilted toward risks on growth, to protect against downward revisions and not be judged to be "looking backward in the curve"-we believe the cuts could very well have begun in July, the Fed could choose to cut by 50 bp.
Yield curve disinvestment has historically been a signal indicating bad times for stocks. Recent employment data was not well received by the markets and may indicate a further steepening of the yield curve, which argues for more defensive positioning.The recent employment data was not well received by the markets and may indicate a further steepening of the yield curve, which argues for a more defensive positioning.
Given current valuations, the prospect of slower economic growth and falling inflation, we believe that fixed income has rarely looked so attractive relative to equities, we believe that fixed income has rarely proved so attractive relative to equities.
Going forward, we maintain our conviction that this year - and beyond - should be positive for fixed income, with lower interest rate risks and historically attractive starting rate levels. The focus on improving quality should allow investors to build resilient portfolios without sacrificing upside potential..
Bonds are back as a hedge after disappointing investors for years. In the equity sell-off events of early August and September, bonds have returned almost 2.0%, while stocks have corrected by about 5%.
In equities, the outsized performance of large-cap stocks is masking weakness in other areas of the market. The early onset of Fed tapering, growing skepticism about the boom of Artificial Intelligence and the high capital expenditures of these big techs on AI, has led to some sector rotation out of big tech and into more interest rate sensitive sectors.
U.S. stocks don't have an earnings problem, but rather an expectations problem.. 2Q24 corporate results beat estimates; however, despite posting year-over-year earnings per share (EPS) growth of 26% this quarter, Mag-7's shares have failed to inspire investor confidence, as the prices of all shares -except Meta- fell by 8% on average in the three days after a reporting.
The proportion of companies exceeding sales estimates in the United States has declined significantly, which could, in turn, affect margins in the second half of the year.which could, in turn, affect margins in the second half of the year.
Against this backdrop, and already thinking about 2025, it is worth asking whether the market's expectations of +15% earnings growth might be a bit optimistic, especially in the context of a slowing US economy and valuations that are at an all-time high (the market is currently trading at 21.5 times forward P/U, which represents a premium of 23% over its historical average).
We maintain a focus on diversification and quality, and a more balanced global strategy to address high U.S. market concentration and unattractive valuations. to address the highly concentrated U.S. market and unattractive valuations.
Finally, we note a crucial differentiation within the U.S. equity market: the S&P 500 equal weight trades at a 20% discount to its market cap-weighted version. market cap. This differentiation may present a better way to gain exposure to the U.S. market.
For more information, please see the attached report.
