Asset Class

Structural (2-3y+)

Cyclical (6-12m)

Tactical (1-3m)

Commentary

(S&P 500 unless specified)

Age of Scarcity means reversal of cheap credit, cheap labor and cheap commodities. Equities to weather era of higher inflation better than bonds (report).
Public pension funds still face funding shortfalls, necessitating a reach for growth and duration, which creates a structural bid for growth equities (chart).

Relative Value:

Capital cycle favors: luxury goods (report), transportation, homebuilders, tobacco, energy (chart).
Electronic equipment, instruments and components dominate the US single stock screen on capital cycle and crowding and is set to be a beneficiary of the mega-trends in automation, IoT and EVs (report).
Avoid: financials, banks, insurance (chart)(report).

Our US EPS leading indicator sees an annualized growth rate of 8.9% YoY, but this has already been fully priced into consensus estimates, with FactSet data showing consensus expects 9.4% growth for CY 2024 and 15.0% for CY 2025 (chart).
There is minimal margin of safety embedded in current valuations, with the S&P 500 trading at 35x cyclically adjusted earnings (chart).

Relative Value:

US small caps should continue to underperform in 2025: the small cap surge following Trump’s election resembles his first term, but this optimism is already embedded in forward earnings forecasts, while small caps will continue to remain at a quality disadvantage (report).
Within US sectors, Energy and Consumer Staples are trading at the largest discount to VP Fair Value while Financials and Materials are trading at the largest premium (chart).
Luxury goods are attractive from a top-down and quant perspective, supported by continued strength in our consumer leading indicators (report)(video)

Tactical Outlook Model is neutral vs other equities (chart)(app)
Fast Money is elevated (chart)
Analog is positive on 100 day forward returns (chart). SPY is trading well above trailing VWAP levels (chart)

Relative Value:

Long volatility expressions are attractive as implied correlations and volatility are near multi-year lows for the S&P 500 (report)(video)

Cyclically, recession risks remain low overall (report). The message from our US growth LEI remains one of an economy that is slowing and set to grow at slightly below trend (but still positive) (chart).
There remains legitimate concerns about downside risks for the US labor market, credit and housing. However, we see consumption remaining resilient. We suspect these factors will generally offset each other and result in another year of steady but unexciting growth (report).
Like 1994, there is upside from an expansion in private investment as manufacturing activity is now free to accelerate. Growth headwinds from a negative fiscal impulse in 2025 are likely to be limited by reluctance/inability to cut defense and entitlements (report)
Preferred thematic exposure: homebuilders, electronic components, energy.

(MSCI EAFE unless specified)

Relative Value:

Our Asset Allocation Engine suggests now is NOT a time to broadly allocate to DM ex US Equities given the current neutral macro regime and moderate liquidity headwinds (app)(report)
Nearly 90% of DM growth LEIs are positive YoY (chart) but China risks in Europe remain (chart).
Our Eurozone earnings LEI is still positive, although appears to be rolling over (chart).

Relative Value:

Relative Value:

Our overall Eurozone growth LEI has rolled over (chart). This largely reflects ongoing weakness in Germany, where our growth LEI implies a 6month estimate of -2.1%. Even excluding Germany, the Eurozone median growth LEI has stalled near 0% (report)(report).
Key inputs to our primary Eurozone growth LEI, such as Swedish new orders to inventories and ZEW economic expectations (which measure financial market expectations), have begun to roll over (chart).
Our Eurozone inflation LEI ticked higher last month, but the point estimate remains at a modest 2.4% (chart), which should not stand in the way of more cuts from the ECB. Our ECB regime model is firmly back in easing regime (chart).

(MSCI EM unless specified)

Relative Value:

Our capital cycle score for China internet stocks has surged higher this year, while valuations still remain low (report). China continues to face many fundamental and structural problems, but as a “surprise” the set up in China tech offers good risk-reward.
Capital cycle favors: Mexico (chart)

Our Asset Allocation Engine suggests now is NOT a time to broadly allocate to EM equities given the current neutral macro regime and moderate liquidity headwinds (app)(report).
The majority of our EM country growth LEIs remain positive YoY (chart).
Our earnings LEI triggered to the upside at end of September, although the absolute level is still negative (chart)

Relative Value:

The persistent trend higher in our Brazil growth LEI is being primarily driven by BCB policy (chart, see right hand panel for driver details). We will look to press our long equities trade AFTER first SELIC cut (report).
In South Africa, a historic coalition government creates an opportunity to allocate to equities. South African equities are trading at a discount to VP Fair Value (report).

Relative Value:

Our preferred thematic exposure of South Africa has a NEUTRAL tactical outlook, while Brazil now has a bullish tactical outlook after a buy trigger in mid-November.

Our tactical models on Chinese equities are turning bullish again, showing the market has likely worked off the excesses from the Sep/Oct rally. At the same time, there are the earliest signs that macro data is going from very bad to less bad (note)
Structurally, EM remains capital scarce, both on an absolute level and relative to the US, indicative of positive outperformance on a 3 year forward outlook (chart).
Liquidity conditions still pose moderate headwinds to EM. This needs to abate before an all clear signal (chart).

Asset Allocation