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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
John Higgins Chief Markets Economist
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Asset Allocation Update

EM assets & the risks from tighter DM monetary policy

We doubt that aggressive policy tightening by developed market (DM) central banks will be followed by a series of financial crises in major emerging market (EM) economies in the way that it has at times in the past. Even so, we still suspect that global factors mean EM assets will generally struggle alongside those in DMs for a while yet, and that many commodities-sensitive EM stock markets will underperform.

27 June 2022

Asset Allocation Update

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.

23 June 2022

Asset Allocation Update

Turning more downbeat on both Treasuries & US equities

The prospect of tighter Fed policy than we had previously envisaged presents upside risks to our forecasts for the 10-year Treasury yield as well as downside risks to our forecasts for the S&P 500. In view of the wider interest, we are also sending this Asset Allocation Update to clients of our Global Markets Service.

14 June 2022

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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

Capital Daily

Falling profit margins another potential threat to the S&P 500

Although the first estimate of US corporate profits for Q1 2022 didn’t reveal a big squeeze on margins in the nonfinancial sector, this could yet be another headwind for the US stock market: we doubt its recovery today sets the stage for a more enduring rebound.

26 May 2022

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
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