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Revisiting the case for US bank equity outperformance

The prospect of weaker economic growth has reduced the appeal of US banks’ equities, even though they may yet benefit from a renewed rise in long-dated Treasury yields and still appear relatively undervalued.
John Higgins Chief Markets Economist
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Asset Allocation Update

Answers to your questions on global markets

We held a Drop In yesterday outlining our latest forecasts for global financial markets. This Update answers some questions that we received during that Drop In but didn’t have time to address. In view of the wider interest, we are also sending this Asset Allocation Update to clients of our Global Markets and FX Markets Services.

10 August 2022

Asset Allocation Update

Credit spreads and excess returns

Although the spreads of many “risky” bonds have risen significantly this year, some aren’t currently at levels that have typically been followed by substantial future outperformance of their “safe” counterparts. Markets Drop-In (9th Aug): Chief Markets Economist John Higgins leads this 20-minute briefing on our latest quarterly Outlook reports from our Global Markets, Asset Allocation and FX Markets services. Register now.

9 August 2022

Asset Allocation Outlook

We think the worst is yet to come for most risky assets

Although we think that we have now passed this cycle’s peak in long-dated US Treasury yields, we still suspect that investors are underestimating just how far the Federal Reserve will raise interest rates, and how long it will be before inflationary pressures ease sufficiently for interest rate cuts to come onto the agenda. With that in mind, we think that the yields of most “safe” assets will end this year above their current levels. Meanwhile, given our relatively downbeat view of the global economy, we also expect most “risky” assets to see renewed declines, as risk premia climb and disappointing growth in corporate earnings undermines global equities. We think, though, that the outlook for most safe and risky assets is brighter in 2023 and 2024.

5 August 2022

More from John Higgins

Capital Daily

Hawkish CBs may cause equities to trough later than bonds

The willingness of major central banks in developed markets to tighten policy further and/or faster to best inflation has resulted in substantial weakness in equities over the past week or so, including a renewed slump today following some short-lived respite after the end of yesterday’s FOMC meeting. And while government bonds have rallied a bit since then, the bigger picture is that they have also suffered recently. A joint sell-off in equities and bonds has been a feature of much of 2022, resulting in a poor performance from a synthetic “60:40” equity/bond portfolio in the US, for example. Markets Drop-In (22nd June, 10:00 ET/15:00 BST): Join our Markets team for this special briefing on the outlook for equities, bonds and FX and a discussion about revisions to our forecasts. Register now

16 June 2022

Asset Allocation Update

Treasuries and US equities less likely to bottom out together

The prospect of even tighter Fed policy than we had previously envisaged raises the risk of a worse outcome for the US economy and corporate earnings further down the line than we had assumed. So, we now suspect that the 10-year Treasury yield will peak before the S&P 500 recovers in earnest. Markets Drop-In (22nd June, 10:00 ET/15:00 BST): Join our Markets team for this special briefing on the outlook for equities, bonds and FX and a discussion about revisions to our forecasts. Register now

15 June 2022

Asset Allocation Chart Book

Twin recoveries in Treasuries and US equities may not last

For much of this year, expectations of tighter Fed policy have driven up Treasury yields, weighing on the US stock market’s valuation in the process. That has changed since we published our last Asset Allocation Outlook, as Treasury yields have dropped back amid concerns about the economic outlook. Admittedly, those worries initially contributed to some further weakness on net in equities, given rosy expectations for earnings growth. But it didn’t last long and the US stock market has since recovered sharply amid hopes that the Fed might dial down its plans for tightening amid tentative signs that inflation has peaked. Nonetheless, we doubt that the twin recoveries in US equities and Treasuries, which have led to a slight turnaround in a struggling synthetic 60:40 portfolio this year, will last. For a start, we anticipate that Treasury yields will resume their rise, as the Fed presses ahead with its tightening cycle. We don’t envisage the 10-year yield, for example, peaking until next year shortly before the last rate hike. And although we anticipate that the US economy will avoid a recession, we suspect that slower growth and squeezed margins will cause earnings growth to fall short of consensus expectations and appetite for risk to remain weak. So, we don’t foresee the S&P 500 bottoming out until mid-2023 either.

31 May 2022
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