United States
This week we present our Portfolio Allocation Summary for June 2023.
It is easy to claim that the ECB is failing in light of today’s elevated inflation readings. Yet, the reality is more subtle and the ECB’s performance lays the ground for stronger growth ahead.
In response to client questions, we offer our view on the purported link between tech stocks and interest rates, the similarities between the S&L Crisis and the current banking turmoil and the near-term outlook for consensus economic expectations.
The S&P 500 performance was flat in May if not for the strong performance of a small cohort of mega-caps, aided by exposure to AI. Earnings and sales growth are contracting but analysts expect a rebound into a yearend, which is already priced in. Yet, inflation is still elevated, and the job market is stubbornly tight – rates will stay much higher for longer, eventually ending the party. Until then, the lopsided equity rally may continue.
The Fed is still on track for a June pause, even after May’s strong nonfarm payroll print.
In this report, we follow up on the upgrade to our US duration stance from last week with a review of our rates views and government bond allocations outside the US. We conclude that while we now find US Treasuries to be more attractive from a value perspective, even better value is available in euro area and UK government debt.
The AI craze could further lift stock prices, boost capex, and delay the onset of the next recession. Looking further out, reaping the profit windfall from AI may take longer than many investors expect.
