Valuations

MacroQuant upgraded equities to overweight in February on a tactical short-term (1-to-3 month) horizon, but it continues to see downside risks to stocks on a medium-term (12-month) horizon. Consistent with the model’s relatively somber medium-term growth outlook, it sees more downside for bond yields on a 12-month horizon than on a 1-to-3 month horizon.

In this week’s report, we release an update to our long-term REER valuation model and expected future returns for major currencies.

Reported earnings for Q4-2023 were rather underwhelming and prone to issues that we have identified over the past few months: Growth is concentrated in just a few sectors and companies, while the profitability of a broad swath of the equity market is under pressure from disinflation and sticky wages. Consumers are still spending, but less enthusiastically than before, while a switch from spending on services to spending on goods is in its very early innings. Downgrade Consumer Staples to neutral.

We created a sector selection scorecard based on performance of sectors under various macroeconomic regimes while taking into consideration revisions to expected earnings growth and valuations in a historical context. Our total sector selection scorecard suggests overweighting defensives such as Utilities, and Consumer Staples, and underweighting cyclicals such as Consumer Discretionary, Industrials, and Financials. Considering this analysis, we have adjusted our sector positioning accordingly.