Following a strong new-year rally in US equities, we have taken profits on the long position we held in the asset class since late October. This takes our stance back to neutral in our multi-asset portfolios, which still have equities generally at ‘dislike’. The adjustment reflects trends in both valuations and fundamentals.
In October, forward equity valuations looked relatively attractive, particularly in the US tech segment, which had undergone an intense devaluation. Market sentiment and technicals, by contrast, looked favourable, as captured in our market temperature framework.
The outlook is now less positive. The S&P500 index has bounced 8% higher in the past month alone. Valuations are higher, with the US market again one of the more mispriced markets from a longer-term perspective (only Europe is more richly valued). The lights from our market temperature framework are flashing amber.
Fundamentals also appear darker. Late last year, analyst estimates for forward earnings by S&P 500 stocks had fallen meaningfully – by the most since 2009 aside from the pandemic period, and to the lowest growth expectations at a year-end on record. The latest earnings reports point to growing margin pressures that could persist for longer. Earnings per share estimates have continued to decline.
With investor uncertainty over US monetary and fiscal policy rising again, we felt taking profits on this tactical position made sense.
Europe dearer, China and EM favoured
European stocks appear more expensive than other markets, looking at the growing gap between the price/earnings ratio, earnings per share, and fair value. Much of the earnings optimism has been concentrated in the energy sector, but companies have toned down their outlooks, so valuations bear close watching. On market temperature, we believe market sentiment is headed for a pullback.
By contrast, Chinese and emerging market equities look fairly priced to us. We believe they offer interesting diversification opportunities given their less discernible links with the performance of other asset classes.
Asset class overview
| Strong dislike | Dislike | Neutral | Favour | Strongly favour | |
| Risk appetite | X | ||||
| Asset allocation | Equities Real estate Cash Government bonds | Commodities Credit | |||
| Equity regions | Europe ex-UK | US Japan UK EM ex-Asia | Emerging Asia | ||
| Equity style/size | EU large cap EU small cap US large cap US small cap | ||||
| Sovereign bonds | US Europe Japan EM local Australia UK Linkers | ||||
| Credit | Emerging market debt US IG US high-yield EU HY | EU investment-grade | |||
| Commodities | Energy Base metals Precious metals | ||||
| FX | USD, AUD, GBP, EM currencies | JPY vs. EUR |
Twelve-month, risk-adjusted view; 21 February 2023; source: BNP Paribas Asset Management
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