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In the research piece, the analysts state that the stock market “may continue to muddle through” as long as the US recession keeps being pushed out, helped by resilient earnings, stabilizing yields, and cautious positioning.
“Amid late-cycle dynamics, everything is up in the air,” the analysts wrote. “Resilient equity indices and froth in AI stocks mask caution, with quality/growth leading, more rotation to bonds/cash and recent profit taking on EU stocks.”
“Positioning is not depressed anymore, but not stretched either. Investors have dry powder to buy dips.”
The analysts acknowledged that tighter credit conditions are starting to bite, but they added that transmission mechanism is slow “as private sector is in good shape post de-leveraging since GFC, while high savings, tight labour market and lower energy prices cushion the consumer.”
They also noted that disinflation is gathering pace and the bulk of rate hikes are done.
“Equities typically held up well when the Fed paused. Weak China raises global growth downside risk, but more stimulus may be around the corner,” they said. “EPS growth is slowing but no more than expected, and we forecast only mild earnings/margins contraction in ’23.”
“We stay OW International equities vs. US, hold residual exposure to Value and Cyclicals, and find opportunities in small caps (BCEUSIZE) and China exposure (BCEUCHIN) amid recent dislocation,” the analysts concluded.
