Equity Strategy: May Chartbook - Entering seasonally tricky time of the year, on top of a challenging combination of inflation at risk of staying too high and profit margin pressures

Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy

We are concerned about inflation staying too high if there is no slack created in the economy, adverse bonds demand-supply with negative term premia, consensus expectation of profit acceleration of almost 20% between Q1 and Q4 of this year, which doesn’t typically happen, especially if the economy softens in 2H, consumer tailwinds potentially turning, as well as concentration and leadership reversal hurting the market. At the core, the Goldilocks view that market embraced in Q1 of inflation/rates moving lower but at the same time of earnings acceleration and economy having no landing remains an inconsistent one. In fact, the Growth-Inflation tradeoff could end up the opposite, as seen in recent ISM showing a spike in pricing and slowing orders. Together with seasonally poor time for markets coming up and still stretched positioning, we look for more of a consolidation in equity markets over the next months. Within this, we advocate for some of the rotations to come up/have legs. Growth is ahead of Value ytd, small caps are heavily behind again ytd. We fundamentally stay with Growth, Quality and large caps tilts, but the turn could be coming, where small caps tended to perform better as ECB starts to ease. Regionally, we have in Q1 taken profits on US vs Eurozone OW, as well as tactically exited our longstanding China bearish stance. The latest market move to a more Defensive trading should have legs, such as recent outperformance of Utilities and Staples, alongside commodity sectors.

This podcast was recorded on 06 May 2024.

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