Asset Class

Structural (2-3y+)

Cyclical (6-12m)

Tactical (1-3m)

Commentary

(S&P 500 unless specified)

Structurally Bullish:

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 Sectors:

Capital cycle favors: 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, software, packaging (chart)(report).

Cyclically Neutral:

Our US growth LEIs continue to improve (report) (chart)
US corporates are starting to show more pricing power (chart) (report), corroborated by our US Earnings LEI trending higher (chart)
S&P 500 valuations are rich, but not at nosebleed levels (chart). The VP “Mehrling” Multiplier, which measures the margin of safety embedded in liquidity, continues to suggest moderate headwinds for risk assets (chart) (report)

Relative Value Sectors:

The covid-distorted inventory cycle is normalizing (chart), favoring 1) electronic equipment, instruments & components 2) household durables 3) building products and 4) distributors (report)
Capital cycle and crowding favors: traditional cyclicals, with retail and oil & gas exploration and production (E&P) as clear outliers (chart)(chart).
Avoid: banks given structural financial repression risks as laid out in our Fiscal Limit thematic (report).

Tactically Neutral:

Tactical Outlook Model is still bullish (chart), but a 4hr LPPL signal recently triggered (chart).
Fast Money is elevated (chart)
Analog suggests positive forward 100 day returns (chart)

Relative Value:

Our US macro outlook is still "benign, not bonanza" but we are not oblivious to other strategists' calls for recession. We have created a “growth scare” checklist of 9 signposts to turn more cautious. Currently, 3 of 9 conditions are met, indicative of some but not high concern.
The absolute level of deficits is still supporting growth, but the marginal change is that fiscal is slightly less impactful vs last year (chart)(report). We continue to expect the deterioration in the US labor market to be slower than expected, which remains a key feature of the post-Covid environment (report).
Overall now is a time to simply maintain equity exposure rather than press over/underweights. US large cap equities have correctly anticipated the strong US growth environment, focus on relative value opportunities: inventory cycle beneficiaries, electronic components, traditional cyclicals (oil & gas E&P, retail), play tactical upside via small caps.

(MSCI EAFE unless specified)

Relative Value Regions:

Relative Value Sectors:

Cyclically Bullish:

There is still no change in our EM/DM liquidity regime model, which still prefers DM risk assets over EM (chart).
DM growth LEIs continue to rebound (chart) offering macro support to pro-cyclical European trades (report)
Our Eurozone earnings LEI continues to improve (chart). Valuations are clearly non-recessionary (chart).

Relative Value:

European chemicals are less crowded and capital-scarce, making the sector a good way to get exposure to the European recovery (report) (chart) (chart)

Tactically Neutral:

MSCI EAFE tactical outlook score is bullish (chart), recent LPPL Bubble Climax signal seems to have played out (chart)
Fast money is elevated and approaching post-GFC highs (chart)
Index is trading above 1y and 3y VWAP levels (chart)

Relative Value:

The upturn in our LEI is corroborated by numerous surveys. The key Swedish new orders to inventory ratio continues to surge higher (chart) alongside the ZEW economic expectations survey (chart).
Credit conditions are recovering, with ECB surveys showing loosening lending standards for consumer loans, which should support the ongoing recovery in loan demand (chart).
Eurozone inflation is under control (chart). Importantly, services price survey is still trending lower (chart), confirming that services inflation pressures are unlikely to experience a second wave. This means that the ECB’s real policy rate is likely to remain high without further cuts, creating further room to cut. Our ECB regime model is firmly back in easing regime (chart).

(MSCI EM unless specified)

Relative Value Regions:

Relative Value Sectors:

Cyclically Neutral to Bullish:

The majority of our EM country growth LEIs remain positive YoY (chart)
Our earnings LEI triggered to the upside at end of 2023, although the absolute level still negative (chart)
LEIs are aligning with technicals and valuations and point to positive forward 6m returns (chart).

Relative Value Regions & Sectors:

Brazil's economy is in a cyclical sweet spot, as growth leading indicators have bottomed and inflation remains under control. Brazilian equities have been notable laggards YTD and are still seeing outflows, but remain capital scarce with cheap valuations (chart)(report). BRL depreciation pressures may cause bumpy ride (report).

Tactically Neutral:

Tactical outlook score is positive (chart), although speculative flows are elevated (chart).
Discount to NAV of EM closed-end funds remains extreme (chart).

Relative Value:

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). Still “A” time, not “The” time to buy.

Asset Allocation