Opinions

US equity markets have fallen sharply in the past few weeks, reflecting a surge in policy uncertainty and growing fears of a sharp economic slowdown. On the other hand, due to German new chancellor Merz's recent announcement of a large fiscal stimulus package consisting of almost 1 TN new spending on defense & infra has led to European equities sharply outperforming US equities. From an earnings point of view, US earnings outlook is beginning to crack. The recent draw down in stocks is signalling to sell-side analysts that they need to bring down their annual profit outlooks even further from here. For Q1 2025, the estimated (year-over-year) earnings growth rate for the S&P 500 is 7.1% against 11.6% as on 31st Dec'24. At this point in time, 104 companies in the S&P index have issued EPS guidance for Q1 2025. Of these companies, 65 have issued negative EPS guidance and 39 have issued positive EPS guidance. The number of S&P 500 companies issuing negative EPS guidance for Q1 2025 is above the 5-year average of 56 and above the 10-year average of 62. US equity funds (-$2.8bn) saw outflows last week, especially notable because the second week of March typically sees large inflows; Europe ($5bn) continued its recent strong run with the strongest inflows in 8 years. CTAs have also been a major driver of European outperformance recently as they sharply increased exposure to the region since the start of the year. We do see L/S hedge funds yet to fully close their short positions that they opened up post the US elections. So not everyone has reduced their bearishness on Europe yet and so there might be more to go in terms of positioning catch-up for Europe.Also, positioning-wise, despite the recent inflows, the long-term gap between Europe and US remains wide. So, the region is far from crowded. Consequently, Europe may potentially attract more inflows as long as growth and activity fundamentals remain supportive. We believe that this developing theme of rotation of flows from US equities to European equities specially Germany is likely to be the theme of CY25. Not only because of German recent fiscal expansion announcements but also because of investor positioning. This will be compounded further by earnings downgrades in US compared to earnings upgrades in Europe. With current US administration policy focus on tariffs, US equities are in a tough spot & will discount corporate tax cuts as well as deregulation efforts.

US equities are entering Q3 earnings season on the back of a 50-bps rate cut by Fed, strong US labor market data & hopes of Chinese stimulus. But then there are headwinds of middle east tension as well as continued storm season in US amid a looming US election in Nov. Currently US equities are in a goldilocks scenario due to expected no landing of US economy. Slightly hot CPI and claims data this week reminded us that soft landing is a fragile concept, yet equities don't seem too bothered. In fact, the steady grind higher in market seems to confirm our recent view that post the sharp summer selling by systematic funds, the asymmetry had shifted to the upside again from a positioning standpoint. We look for S&P 500 earnings growth to decelerate modestly from 11.8% in Q2 to 9% in Q3. The slowing is driven by a narrow group of sectors and in our reading is well understood and temporary. Over half the slowing (2.8pp) comes from Energy (1.5pp) on the back of lower oil prices; another significant chunk from the widely anticipated continued slowing for MCG (Mega Cap Growth) & Tech (1pp). Growth for the rest should hold steady in the mid-single digits. Looking ahead, we see S&P 500 earnings growth reaccelerating in Q4 (16%) and through 2025 (11%) as the broader cyclical recovery continues to widen. The playbook for close US elections has historically been for the market to pull back (4-5%) starting a month before and then rally into year-end on a clear resolution. But this time it looks different considering the goldilocks environment & market positioning of systematic funds. We continue to expect S&P 500 make new highs towards 6000 by the end of CY24.

Nvidia's Q2 earnings did beat the analysts estimates & even the Q3 guidance was higher than average analyst estimates but the beat was the smallest in last 2 years. Combine that with the lack of clarity on the timing & amount of shipment of it's forthcoming Blackwell Chips, we get a sense that the stock might correct towards 100 levels than making new highs above 141 levels. Large investors such as CALPERs too have started exiting the stock in Q2.

Introduction: Globally the trend of disconnect between equity markets & real economy is at it’s maximus. While economic indicators in US are flashing amber, S&P 500 continues to make record highs. The trend is common across UK, Eurozone as well as certain Asian markets.

Q1CY24 earnings results from US equities have significantly surprised on the upside, led by the super strong earnings results from the tech giants. S&P 500 is on track to post 7.1% earnings growth for the January-March period, topping analysts’ preseason estimates of 3.8%.

US earnings season start in earnest this week with 4 out of the magnificent 7 reporting earnings this week. Microsoft, Meta, Alphabet & Tesla will report their earnings this week. Around 178 S&P 500 companies — representing more than 40% of the index’s market capitalization — will post results this week.

All measures of earnings beats in the US are well above the upper end of their pre-pandemic ranges. Such elevated beats have historically been seen only in the early stages of recovery from major cyclical downturns. Beats in Japan are also strong, but they tend to be very volatile.