Rotation and broadening in equities has started

US mega caps significantly outperformed the rest of the US markets in the first half of the year, driven by better-than-expected economic activity, AI exuberance and superior earnings. Looking ahead, we see a potential for a rally-broadening, which will not be linear and is likely to have multiple legs...

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Vincent Mortier

Vincent Mortier

Group CIO

Rally broadening, backed by the Fed put and improving earnings, could ignite a resurgence in previously neglected segments.

Vincent Mortier, Group CIO

Stay risk-on but well-diversified

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Stay risk-on but well-diversified

Softening economic activity in the US is reflected in the rebalancing labour markets and weakening consumption. This is happening at a time when the US fiscal deficit is increasingly in focus. In Europe, we expect growth returning towards potential during the year, although there could be some vulnerabilities. This mixed environment calls for a mildly positive stance on risk assets, but investors should diversify their risks.

Fed gaining confidence in easing policy

The downshifting of the US economy along with declining price pressures are indicative of the upcoming Fed pivot. Similarly, inflation is falling in Europe but some components such as core and services inflation remain a bit sticky. Hence, while central banks seem to be on the path to cut policy rates, any volatility on inflation or economic resilience could mean they would remain patient. On the fiscal side, deficits are important determinants of the premium for holding government debt in the long term.

Fed gaining confidence in easing policy

stacking coins

Earnings resilience essential for rotations to sustain

a woman looking at the stock exchange market

Earnings resilience essential for rotations to sustain

Equity markets are being driven mainly by rate cut expectations, politics, and economic momentum. The Federal Reserve is expected to cut rates due to slowing inflation, recent mixed economic data and weakening labour markets, which supports our view of a decelerating economy. Despite this, US large caps have remained strong, driven by rate cut expectations and following the narrative that bad news is good for the markets. 

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