The U.S. has been the largest contributor to the strong performance of global equities, and in the coming months, its economic growth is expected to continue normalizing, as well as inflation.
Under this scenario, it is likely that the rate-cutting cycle will begin in the third quarter, paving the way for more relaxed financial conditions and an improvement in earnings expectations for listed companies, thus continuing to create a favorable environment for U.S. stocks.
However, high valuations, concentration in the technology sector, and economic indicators such as the LEI and ISM that signal cooling have raised questions about the appeal of U.S. stocks in the coming months.
Macroeconomic scenario
We are witnessing an economic activity normalization accompanied by a necessary slowdown to ease future inflationary pressures and, of course, the first rate cut by the FED. The outlook is not uniform; for example, consumption data has been showing a slowdown, while Q2 GDP exceeded expectations, coming in at 2.8% vs. the expected 2%.
The concern in this case is that the labor market could cool faster than anticipated. However, our interpretation of the relatively weak data is that it represents a normalization toward pre-pandemic levels. In line with market expectations, we assign a low probability of recession over the next twelve months.
Market Signals
Although current valuations are high, they remain below the peaks reached in 2000, 2020, and mid-2023.
Additionally, current valuations are accompanied by improved profit generation dynamics for companies.
As for the current concentration, this has contributed to an exceptionally strong period of returns in the U.S. market. Over one-third of that gain has come from the ten largest stocks, supported by very solid fundamentals (sales, earnings).
Will Other Sectors Catch Up?
We expect the rest of the market to close the earnings generation and valuation gap with technology stocks. For example, the energy sector will likely benefit in the coming months from high energy consumption driven by AI.
Earnings expectations have been adjusted downward, with the contribution to profits expected to be higher from technologies than from the index, but it seems the market is making some catch-up progress.
As we see slower growth and lower inflation, we expect a lower TPM (Monetary Policy Rate), which could favor underperforming sectors such as financials, where we anticipate a recovery. Additionally, due to concentration concerns, we have some preference for more defensive sectors, such as healthcare and communications.
With this in mind, we continue to favor positioning in U.S. equities for the coming months.
