There has been a steady drumbeat of recession calls over the past year, yet the global economy has proven resilient. A just-published report updated our multi-asset recommendations, concluding that it is still prudent to be cyclically cautious because of the elevated level and stickiness of core inflation in the DM world.
Nevertheless, a reprieve on the interest rate front will be a near-term positive for stocks, as central banks will want to assess any possible economic fallout from the last month’s mini banking crisis. This period of calm in the bond market means that corporate earnings will be critical to the equity market outlook.
Global 12-month forward earnings have been remarkably sturdy despite the economic slowdown in the later half of last year. Indeed, forward earnings are only about 3% below last year’s peak, with about a 5% decline for the U.S. and small drop for the global ex-U.S. benchmark. More positively, the earnings revisions ratio (net upgrades relative to total revisions) is hooking up.
There are good prospects for modestly higher equity prices for as long as the bond market stays calm. Ultimately, we expect another round of rate hikes and higher bond yields, but a reprieve phase is underway. The euro area remains our favorite regional play, and we are also overweight emerging markets on the expectation of a continuing improvement in Chinese earnings.