Equity: Earnings LEI steady but high US valuations suggest being selective

Our unsmoothed US EPS leading indicator ticked up again this month to 9.0% annualized. This is in line with recent profit growth as well as consensus forecasts of 7.2% for 4Q25 and 10% for calendar year 2025 from the Factset Earnings Insight.

While our Macro Risk Indicator implies overweighting equities, the high valuation of the S&P 500 suggest to be more selective with equity exposure. The S&P 500 price-to-5y-peak-EPS ratio using forward earnings is as high as 2021 and the dotcom bubble.

We are looking to add risk exposure in select US sectors and EM equities.

Among US sectors, our fair value models still see the most upside in energy, and to a lesser extent healthcare. Within energy, oil services are still in a large drawdown from 3-year highs. We still like energy-linked stocks that benefit from higher volumes for oil and gas, as we highlighted in a Note earlier this summer.

Outside of the US, the liquidity backdrop favors EM over DM equities, and India and Brazil remain our top choices. We are watching our tactical models for opportunities to add exposure to these and other markets, as we laid out in our latest EM/DM LIW report.