Equities in a MAGA World:

Elections and beyond

1. Seasonal tailwinds – The market is entering the best six- month period of the year. Since 1950, the S&P500 returned on average 7,1% and traded higher in 77% of the occasions. 
   
   
2. November  – when the sun shines bright for equities. November is the among the best months of the year, even in election years. We see several factors supporting this thesis. Supply from the largest sellers in the market –mutual funds having year end and pensions – will fade. In fact, November is the 4th largest month in terms of inflows into mutual equity funds in the US. Demand is likely to be increased further as corporates - the biggest buyers of equities - are about to come back online. November is the most important month for US buybacks, accounting for ~ 10,4% of the yearly flows
   
   
3. Earnings Season – A global mixture of light and  shadows
   Europe continued to report earnings falling short of expectations. Companies with substantial China exposure have cited this factor as a drag on earnings. Consequentially, earnings expectations continue to fall. The S&P 500 is continuing to report mixed results vs estimates as well. Earnings surprises remain positive but trail their long-term averages. However, the index is still reporting higher earnings for Q3 relative to the end of last quarter. 

Main recommendations

The US economy should see a growth boost which we expect will disproportionally benefit domestically exposed cyclical areas of the market. We thus upgrade US equities to overweight but remain our relative preference of mid-/small-caps over equal-weight S&P 500 over cap-weighted S&P 500 in the US.

The eurozone economy is weak and the  manufacturing sector is deteriorating. With the threat of tariffs, we don´t see substantial drivers to change this. The fact that the region is cheap isn´t sufficient to maintain an overweight rating. We downgrade Europe to neutral.

The election outcome also has a material impact on our sector views. We thus changed several ratings, such as downgrading Energy on a global basis to underweight or upgrading US Consumer discretionary to neutral.

The key risk is a resurgence of trade wars with increasing tariffs and retaliations. These actions could derail growth and force central banks to reverse course on rates, as inflation would likely flare up again under such a scenario.

Trump 2.0

IS MAGA also mega for US equities?

Downgrading European equities to neutral

The prospects for Europe worsened materially recently. Not only is the threat of a reacceleration of global trade wars jeopardizing our view of a growth recovery, but it also does at the potentially worst moment in time. With the breakdown of the German ruling coalition, the second large component of the European core besides France will most likely be occupied by domestic issues in the near term. This makes a coordinated European response to any US demands more complicated. Due to its open and export-oriented business structure, Europe would also suffer from escalating trade tensions between the US and China. While our base case neither assumes a global 10% tariff rate nor a 60% tariff on China, the mere tariff uncertainty could create severe growth scares, as uncertainty usually hinders investments.

Earnings for European companies so far have been mixed. While free float market cap-weighted earnings results have come in 3.7% ahead of consensus, earnings revisions breadth remains negative. Earnings trends appear broadly negative, with significant revisions, but the impact is particularly for severe China-related sectors such as automakers, luxury goods, and commodity producers. This is particularly important as it puts the expected earnings growth for 2025 at risk. Even more, as a 0.1 ppt sales weighted GDP reduction could cause STOXX 600 earnings to fall by 1%.

Within Europe we favor the UK and see value in the periphery as well as in the Nordics, especially Sweden. 

Upgrading US equites to overweight

Following the “Red Sweep”, we should see the implementation of many – if not basically – all proposed fiscal stimulus packages, including tax cuts and deregulation.

It´s worth to keep in mind that SMIDs have a higher gearing to tax rates because, among other factors, their effective tax rate is currently higher than for large caps. If we combine that with a policy mainly focused on the domestic economy, we see the stars aligning for a more sustainable move from rather expensive US mega caps to more reasonably priced areas of the market. We thus stick to our relative preference of SMIDS > SPW > SPX.

Since tax cuts and deregulation should also help driving manufacturing PMIs higher, we continue to like cyclical, domestically oriented exposure. Financials is our key sector conviction in the US as the sector should benefit from a “higher for longer” rates environment and ongoing deregulation.

Key messages

The eurozone economy is weak and the  manufacturing sector is deteriorating. With the threat of tariffs, we don´t see substantial drivers to change this. The fact that the region is cheap isn´t enough to maintain a positive rating. We downgrade Europe to neutral.

The US economy on the other hand should see a growth boost which we expect will disproportionally benefit domestically exposed cyclical areas of the market. We thus upgrade US equities to overweight but remain our relative preference of SMIDS > SPW > SPX in the US.

Earnings Season Review

Europe: New Quarter, same old story

Much of this European earnings season has echoed Q2 with many industries, especially manufacturing cyclicals, downgraded their numbers as the long-awaited recovery keeps getting delayed.

With over 80% of companies reported, the picture mirrors the current weather tristesse of a grey and rainy November. Just 37% of companies have beaten top-line estimates, with total revenue falling short of forecasts. In contrast, bottom-line earnings have been a bright spot, with 70% of companies delivering beats – but this is largely due to aggressive cost-cutting rather than impressive sales growth or pricing power. We fear that an increased cost-focused strategy is providing harm in the long term as it is preventing  investments in future growth.

In terms of regional exposure, China still dragged down the numbers of exposed companies. On the other hand, European companies with large US exposure have outshone their China focused peers (and the European domestic-focused ones).

USA: a mixed bag

Overall, 91% of the companies in the S&P 500 have reported for Q3 2024 to date. Of these companies, 75% managed to beat EPS estimates, which is below the 5-year average of 77% but in line with the 10-year average of 75%. In aggregate, companies are reporting earnings that are 4.3% above estimates, which trails both the 5-year average of 8.5% and the 10-year average of 6.8%.

Seven of the eleven sectors are recording year-over-year EPS growth, led by the Communication Services and Health Care while four sectors are reporting a year-over-year earnings declines, led by Energy and Materials.

In terms of revenues, 60% of S&P 500 companies have reported actual revenues above estimates, which is below the 5-year average of 69% and below the 10-year average of 64%. In aggregate, companies are reporting revenues that are 1.2% above the estimates, which is below the 5-year average of 2.0% and below the 10-year average of 1.4%.

Japan – High confidence is boosting share buybacks

While the earnings look to have made superficially poor progress, we think they are not as bad as they look. It´s worth to note that in terms of sales, domestic demand sectors, such as electric power & gas, retail, and transportation, had an above average percentage of companies beating expectations. Overall net profits have not beaten estimates at as many companies as usual, and revisions to full-year guidance are not improving.

However, sales and operating profit in core businesses relative to market forecasts are around usual or only slightly lower for both results and guidance revisions. We think this is not bad as the earnings period saw exchange rate fluctuations and uncertainties regarding the US presidential elections, likely leading in cautious management commentary.

According to the Nikkei September “100 CEO Survey” (only a Japanese-language version is available), 70% of corporate managers say the Japanese economy is expanding, and many of them expect it to continue to grow over the next six months, so business sentiment is strong, encouraging a further growth in buyback announcements.

Diverging fortunes in Emerging Markets

MSCI Emerging Markets

We are about three-fourths of the way through the 3QCY24 reporting season for MSCI EM as about 74% of the index market cap has reported so far. Out of the reported companies that have consensus estimates, 23% have beat estimates by more than 1 s.d., 45% have reported in line, while 32% have missed by more than 1 s.d.

Median EPS surprise is about -3%, suggesting the season is tracking slightly below consensus estimates. Within the regions, MENA (UAE, Qatar) and LatAm (Chile, Brazil) have surprised positively (+6% surprise), while Asia (China, Korea, India) has surprised negatively (4-5% negative surprise).

India

MSCI India 2QFY25 profit growth was soft at 10% yoy (below 13% avg and 4pp below consensus expectations at the start of the results season) driven by slower revenue growth and weaker margins. Ex-Financials, revenues grew at 4.9% yoy (vs 5.6% last quarter) and while net-profit margins of 10.2% (ex Fins/Commodities) were down 80bps sequentially.

Earnings 'misses' (48% cos) outpaced 'beats' (36% cos) and the quarter saw a higher proportion of misses vs history (39% average). MSCI India avg EPS surprise was -4%. At a sector level, Commodity and Investment cyclical sectors (energy, industrials, metals, cement, utilities) saw more misses than beats.