Summary
1. Godot Arrived– Iran and the USA agreed on a memorandum of understanding to end the hostilities in the Middle East and to unblock the vital chokepoint. The outcome for markets and the economy is clear. The biggest tail risk has been cleared. We think this will unlock further upside for equities as the major drivers, i.e. strong AI spending and a robust US economy, should remain on top of investors' minds
2. A Resilient Economy– Despite record disruptions in energy markets the global economy was surprisingly resilient, especially in the US. This economic strength was accompanied by a strong job market, which is not only supported by a recovery in open jobs but also buy a pickup in new business formations.
3. Higher for Longer?– Entrenched Inflation and strong growth could limit the potential for rates to fall. Higher rates would affect the stock market as it should reduce the potential for further multiple expansion. This is especially true as equity risk premia is already close to a 20-year low. Hence, earnings growth is likely to be the key determinant of upside potential for markets going forward.
4. Houston, we have a (growth) problem – Europe lags a meaningful AI exposure which helps propelling other markets higher. Moreover, the old continent could suffer from higher energy prices for an extend period of time. We see the risk of downward pressure on European earnings. Thus, we would not chase any rally in European stocks.
5. Sector update– We adjust several sector ratings to reflect the improved economic outlook. Generally speaking, we are turning more pro-cyclical in our preferences.