Summary
1. It Takes Two To Tango – rising yields have not weighed on equities. This may look counterintuitive at the first glance but can be explained by superior earnings growth. If earnings outgrow rates, equities remain attractive. We also don´t see evidence of large reallocations into bonds. We remain overweight equities. Continuous upward revisions to EPS growth forecasts are a key pillar of the bull market.
2. Kissed By The Muse – Earnings momentum in the US remains exceptionally strong as the AI infrastructure buildout is increasingly met by rising demand from corporate and private users. We upgrade US equities and Information Technology to overweight and recommend fading US large-cap and Hyperscalers underweights. The combination of emerging (Agentic) AI monetization avenues, resilient business models, and solid earnings/ improving cash flows at hyperscalers has bolstered our confidence in their expected free cash flow (FCF) recovery (likely within 12-24 months).
3 We turn neutral on US small versus large caps and no longer prefer the equal-weighted S&P 500 over its cap-weighted counterpart.
4. Europe- The Weakest Link - While the headwinds for European equities remain plentiful, tailwinds are harder to find. We downgrade European equities to underweight not because we´re outright bearish but because we feel it is the weakest link in our coverage and is most likely to trail global peers. At this point, Europe remains a place for stock picking, not for owing broad market exposure
5.European banks are downgraded to Neutral and European Technology is upgraded to Overweight - rising inflation, yields and political issues could hurt banking businesses and push investors to book some profits. Wait for a more stable environment before re-entering European banks and/or buy on dips.