#StockMarket #TechEarnings #InvestmentStrategies
Today, the stock market witnessed significant rotations, driven by the extrapolation of recent macro trends. The surprise drop in the Consumer Price Index (CPI) has fueled expectations of more rate cuts, leading to a powerful rotation in small cap stocks.
Market Take
The current market environment is characterized by high uncertainty, with structural forces such as labor shortages, geopolitical fragmentation, and the low-carbon transition pointing to inflation settling at a higher level compared to pre-pandemic levels. Despite this, the first Federal Reserve rate cut in the cycle is expected in September, and rates are likely to remain high for longer compared to pre-pandemic levels.
Fundamentals and Earnings Prospects
Fundamentals and earnings prospects remain key for deploying risk in equities. Tech companies are expected to deliver year-on-year earnings growth of 18% in the current earnings season, with the U.S. broad market expected to grow by 9% and U.S. ex-tech by 2%. This suggests that tech firms are likely to continue performing well despite near-term volatility.
Near-term Volatility
Until the earnings season peaks with Nvidia's report at the end of August, some steam may be let out due to recent rhetoric and summer thin liquidity. However, this volatility is seen as healthy and presents opportunities to lean into dislocations created by re-underwriting conviction in the fundamental picture.
Tactical Views
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Equities:
- United States: Overweight, given the positive view on the AI theme. Valuations for AI beneficiaries are supported as tech companies keep beating high earnings expectations.
- Europe: Underweight relative to the U.S., Japan, and the UK, due to fair valuations and political uncertainty.
- U.K.: Overweight, driven by political stability and a growth pickup.
- Japan: Overweight, supported by mild inflation and shareholder-friendly reforms.
- Emerging Markets: Neutral, with mixed growth and earnings outlook.
- China: Neutral, due to risks from weak consumer spending and structural challenges.
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Fixed Income:
- Short U.S. Treasuries: Overweight, preferring short-term government bonds for income as interest rates stay higher for longer.
- Long U.S. Treasuries: Neutral, with markets cutting expectations of Fed rate cuts and term premium close to zero.
- Global Inflation-Linked Bonds: Neutral, seeing higher medium-term inflation but cooling inflation and growth near term.
- Euro Area Government Bonds: Neutral, with market pricing reflecting policy rates in line with expectations and 10-year yields off their highs.
- UK Gilts: Neutral, with gilt yields tightened to U.S. Treasuries and market pricing of future yields in line with expectations.
Historical Context
The stock market's tendency to move in unpredictable ways is reminiscent of the 1929 crash, where economist Irving Fisher proclaimed that stock prices had reached a "permanently high plateau" just before the epic boom ended in a crash.
Time in the Market
The importance of time in the market is highlighted by the fact that most years, the majority of gains occur on 10-20 individual days. If you are not invested on those days, you will miss a potentially significant portion of the gains. Historically, the best outcome comes from investing as much money as possible as soon as possible.
Conclusion
Today's market movements underscore the need to stay focused on fundamentals and earnings prospects, even in the face of near-term volatility. By understanding the structural forces driving the market and staying invested, investors can maximize their returns over time.
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