How much higher can the stock market go? This is the question answered in the long analysis by the Strategy Unit of Pictet Asset Management. “Despite the rally of the last eight monthswhich affected about 26% of global stocks, “stocks continue to be supported by a solid economic outlook and fears of persistent inflation also appear to be fading.”
Stocks under the lens
“However, this positive fundamental picture must be weighed against two potentially negative developments. First, theor the European political scenario is tense, with France’s future seemingly uncertain after the outcome of the early parliamentary elections. The second contrasting element is how investors are currently positioned on equities: our indicators show how these are extremely bullish. Despite this, we continue to believe that the risk analysis confirms an overweight position in the stocks, neutral for the bonds and underweight in liquid assets”.
Our business cycle indicators – it reads – they are positive, as well as the economic outlook for emerging markets, which are benefiting from rising commodity prices and improved global trade dynamics. In Europe, our leading indicator continues to improve, as does the inflation picture, and we expect this trend to continue, supported by gradual rate cuts by the European Central Bank. In the United States, meanwhile, recent macro data has weakened, leading us to expect growth in the world’s largest economy to slow to about 1% annualized by year-end due to weak consumer spending and residential investment.
How much higher can the market go?
Our global liquidity scores for the riskiest asset classes remain neutral. Half of the central banks we monitor are waiting to set their policy: 37% are on the path to easing, while 13% are on the path to tightening, especially in Japan. An increase in the percentage of central banks easing could translate into an improvement in economic conditions. Our analysis “shows that a decline in central bank interest rates tends to be followed, nine months later, by an increase in leading indicator. Current liquidity levels therefore support our broadly positive stance on global equities.”
In the stock market, “Our valuation models support our preference for European equities over US equities. Europe is the second best-priced region in our model, while the US is by far the most expensive. Overall, about 80% of asset class in our valuation model is trading above average, which has only happened three times in the last decade. This suggests that the market may be experiencing a phase of over-optimism and that it may be time to turn our attention to safe haven assets such as the Swiss franc, Gold and US Treasuries. Technical indicators indicate that momentum remains positive for stocks and that the market is not yet overbought, with the equity flows which remain strong and in contrast with the usually weak seasonal trend”.
Regions and equity sectors: lower exposure to IT
Since the beginning of the year, the market capitalization of the S&P 500 “has increased by $5.8 trillion, of which 31% is attributable to Nvidia alone. All of this leads us to reflect carefully, especially when we consider the vulnerabilities of the IT sector. While corporate earnings remain healthy overall and, for our part, we continue tooverweight the equity asset classwe remain cautious given the market’s earnings concentration. After the technology sector gained another 9.5% on a monthly basis, bringing the rally since the beginning of the year to 26%, we have therefore reduced our position in this sector.Earnings momentum corporate stocks remain strong, despite being driven mainly by semiconductors, and there is potential for a significant jump in these stocks if the Federal Reserve decides to cut interest rates sooner than expected. market”.
Focus on utilities and real estate
“We then continue to to overweight the sector of utilities, which offers defensive characteristics and stable earnings at attractive valuations, which could prove advantageous given early indications of a slowdown in consumption. We are also overweight communication services, with earnings remaining strong and the sector currently showing a buyback quota above average. We are underweight the real estate sector, which is still under pressure due to high rates and with analysts continuing to reduce its profit forecasts”.
“We have left the weights unchanged on a regional basis, continuing to overweight the Eurozone, Swiss and Japanese stocks. Despite concerns over early elections in France and the UK, Europe offers access to a durable cyclical recovery at attractive valuations. While structural considerations are in favour of Japanese stocks: we believe Japan will benefit from improvements in corporate governance and the combination of still accommodative monetary policy and a weak yen; earnings revisions are still robust, although they are losing some momentum”.
