Interview
What's behind the US equity underperformance?
- First-quarter market performance is projected to land on the weaker end of expected ranges, with potential for upside given that current tracking estimates may be overstated and growth views have been revised down by approximately 150 basis points.
- The economic baseline case for the current year forecasts year-on-year growth of 1.7%, revised down from 2.4%, while market pricing currently reflects a slowdown rather than a recession, though plausible downside scenarios remain unpriced.
- Real economy data from the March dataset, released in April, is expected to clearly demonstrate negative impacts on consumer spending, business investment, and hiring decisions, with near-term payroll reports likely showing noticeable employment deterioration.
- The Federal Reserve is anticipated to maintain a cautious stance on rate cuts until data inflection occurs, with an expected initiation of cuts in June and a total of 75 to 100 basis points of reductions in the second half of the year.
- Policy shifts regarding tariff impacts are viewed as one-time adjustments, allowing the Fed to justify moving from restrictive to neutral levels if long-term inflation expectations remain in check.
- The U.S. yield curve is forecast to continue steepening, favoring front-end positions and steepeners due to rising probability of cuts, with no bear case anticipated for the U.S. bond market over the coming months.
- European markets, particularly Germany, have seen upside surprises from fiscal plan shifts, including a specific expectation of 500 billion euros in defense spending driven by current administration pressure.
- European equities face vulnerability if U.S. growth expectations are downgraded further, as global decoupling limits may cause European markets to participate in a global downward move.
- U.S. exceptionalism is expected to diminish as capital flows diversify to alternative markets, driven by less compelling risk-reward profiles for U.S. equities and the "Magnificent Seven," which now feature fatter downside tails.
- Market volatility is predicted to increase with headlines trading at high velocity, potentially causing single-day changes, while the divergence between U.S. and European markets is expected to remain less amplified than the current point forward.
- Over a 12-month horizon, the U.S. may regain ground, though markets could remain choppy with lower Sharpe ratios and decent troughs as the risk-reward dynamic shifts away from exclusive U.S. allocation.