Global, US Stocks Undergoing Healthy Consolidation

Global and US stocks are undergoing a healthy consolidation, in our view, after scaling record highs. This follows higher bond yields after strong US economic data, weak government bond auctions and hawkish Fed comments. However, US earnings estimates have been revised higher and US CEO confidence is upbeat. Our quantitative models and charts remain bullish, especially on US equities. The S&P500 index has strong technical support around 5,071 (3% below Thursday’s close). We expect bond yields to decline over the coming months as inflation eases and, thus, would look for an opportunity to average into US stocks as they consolidate. Friday’s US inflation data, next week’s job market indicators and ISM manufacturing PMI are the next likely drivers of US equities. We also see tactical opportunities in China equities (see page 4).  

Strong data: Economic data in May have been surprisingly strong, recovering from a slowdown in April. Manufacturing sector activity indicators (S&P Global PMIs) improved in the US, the UK, Euro area and Japan. Service sector PMIs stayed in expansion across these markets, led by the US. However, US manufacturing sector new orders are declining, while service sector employment is contracting. Next week’s US ISM manufacturing PMI and jobs data should throw more light on the underlying strength of the sector.

Meanwhile, US consumer confidence (measured by the Conference Board) surprisingly rebounded in May after three straight months of decline. This indicator is primarily influenced by the job market, which explains why this indicator has been robust. Overall, the US economy continues to grow at a healthy clip, as reflected in the Fed’s latest Beige Book survey and the Atlanta Fed’s GDPNow estimate of Q2 24 growth at 3.5%.

Improving earnings outlook: The robust economic backdrop is reflected in US corporate earnings. After a stronger-than-expected Q1 24 earnings season, consensus has revised 2024 full-year earnings growth estimate higher to 11.1% and 2025 estimate to 14.2%. The technology and communications services sectors are leading this earnings upturn, with 18.1% and 23% earnings growth in 2024. This supports our continued preference for these equity sectors. The upbeat outlook is also reflected in this year’s rise in the CEO Confidence index.

Watching bond yields: While the macro backdrop remains robust, the 5% level on the US 2- and 10-year government bond yields are key thresholds to watch. This yield level has acted as a self-correcting moderator of near-term financial conditions over the past year. A rise in yields towards this level has resulted in tighter short-term financial conditions, dragging risk assets temporarily lower and eventually dragging bond yields back down from this threshold. Any sustainable break higher in the bond yield above 5% would likely suggest a shift from the current not-too-hot, not-too-cold Goldilocks regime, which is positive for risk assets. On the downside, the 10-year bond yield’s low of 3.8% last December offers a strong support. A break lower would signal deteriorating economic outlook.

European government bonds. We see value after the latest run up in yields. Euro area inflation is falling faster than in the US. We see next week’s expected ECB rate cut as the start of an easing cycle. Thus, European government bonds remain one of our opportunistic Buy ideas. We also expect modest EUR weakness if the ECB provides a dovish signal next week.

Indian elections. Exit polls are due after the last elections close on 1 June (official results on 4 June). India equities have historically delivered strong near-term returns if the results confirm initial estimates. Any upsets could lead to a knee-jerk reaction. Strong growth outlook and corporate earnings should provide support in the event of any pullback. Election outcomes have had little long-term impact on Indian equity returns. This week, S&P Global upgraded India’s rating outlook to ‘positive’.

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