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Examining the threat to US equities from rising wage inflation

We expect rising wage inflation in the US to squeeze the profits of the non-financial corporate sector, which were a record high as a share of its output in Q2. This is one reason why we think the upside for the stock market there is limited, despite expecting it to continue to outperform Treasuries.
John Higgins Chief Markets Economist
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Asset Allocation Update

Yield curve positioning after peak inflation

Although Treasury yields have dropped back in recent weeks amid signs that inflation has peaked, we don’t think it makes sense to extend duration. Of course, the longer a bond’s remaining life, the greater the sensitivity of its price to a change in its yield. So, those with distant maturities would tend to deliver better returns if yields fell further alongside inflation, even if the curve bull steepened a bit. But we suspect there will be a considerable lag between peaks in inflation and yields, as there was in the early 1980s.

24 May 2022

Asset Allocation Update

On the relative prospects for US equity REITs

We expect US equity REITs to remain under pressure between now and the middle of next year, given our view of the US stock and bond markets. Nonetheless, we doubt they will underperform US equities substantially given their relative valuations – we see no clear evidence that they are in more of a bubble; the overall outlook for the property markets in which they invest; and their apparently solid fundamentals.

17 May 2022

Asset Allocation Outlook

Asset allocation after inflation has peaked

Although we suspect that inflation in the US has now peaked, we don’t think that this will prevent either long-dated Treasury yields from rising again or the stock market there from coming under renewed pressure until the middle of next year. Indeed, we expect most “safe” and “risky” assets to fare poorly between now and then. This reflects a view that their fortunes won’t turn around decisively until shortly before the Fed stops tightening policy in summer 2023, even if the central bank engineers a “soft landing” for the economy in the meantime. Markets Drop-In (11th May, 10:00 EDT/15:00 BST): We’re discussing our Q2 Outlook reports and what they say about the potential performance of bonds, equities and FX rates as inflation peaks in a special 20-minute briefing on Wednesday. Register now.

10 May 2022

More from John Higgins

Capital Daily

No sign yet that peak inflation is a watershed moment for markets

So far, at least, tentative evidence of a peak in inflation in today’s US consumer price index report has not been a watershed moment for US government bonds or equities. Both Treasuries and the S&P 500 initially reacted unfavourably, probably due to a greater-than-expected monthly rise in “core” prices. We don’t expect their fortunes to improve decisively until shortly before the Fed stops tightening policy in summer 2023, even as inflation drops back further and the US economy experiences a “soft landing” in the meantime.

11 May 2022

Asset Allocation Outlook

Asset allocation after inflation has peaked

Although we suspect that inflation in the US has now peaked, we don’t think that this will prevent either long-dated Treasury yields from rising again or the stock market there from coming under renewed pressure until the middle of next year. Indeed, we expect most “safe” and “risky” assets to fare poorly between now and then. This reflects a view that their fortunes won’t turn around decisively until shortly before the Fed stops tightening policy in summer 2023, even if the central bank engineers a “soft landing” for the economy in the meantime. Markets Drop-In (11th May, 10:00 EDT/15:00 BST): We’re discussing our Q2 Outlook reports and what they say about the potential performance of bonds, equities and FX rates as inflation peaks in a special 20-minute briefing on Wednesday. Register now.

10 May 2022

Capital Daily

Why inflation could drag down stock market multiples further

We don’t subscribe to the view that the current high level of inflation in the US justifies a very big drop in its stock market. Nonetheless, we do think its valuation looks a bit high even if inflation has topped out – especially given a less-than-rosy outlook for economic growth. So we think it is set to fall further. Global Outlook Drop-In (4th May, 10:00 EDT/15:00 BST): Our Global Economics team will be answering your questions as they and discuss their Q2 Outlook report in this special 20-minute briefing. Register to learn more about our above-consensus views on inflation and rates and how these feed our below-consensus take on the growth outlook. Register now

3 May 2022
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