Cyclical Asset Allocation: “Risk-on” tailwinds persist, potential for equity rally to broaden out

Our Macro Risk Indicator remains in “risk-on” territory as our leading indicators for liquidity, growth and policy remain supportive of the 6m-forward outlook for risk assets. 

The incremental positive since last month is that our Eurozone and China growth leading indicators have recovered further, while our US growth leading indicator remains resilient.

The vast majority of central banks across the world are still easing policy in sync (link), while global excess liquidity remains positive (link).

It is notable that the correlation between the S&P 500 and the equal-weighted S&P 500 has fallen dramatically (bottom right chart). Historically, sharp drops in correlation have been indicative of changing investor behavior and the potential for equal-weighted indices to outperform. Such a broadening out of the equity market rally would be consistent with the risk-on macro backdrop.