UBP House View - July 2024

Key takeaways

Editorial

Risk-taking paid off

With equity markets rallying despite 10-year US Treasury yields rising above 4.5%, risk-taking was rewarded during the first half of the year.
Momentum has been propelled by earnings growth and the “Magnificent 7”, a group of companies leading the artificial intelligence revolution. Overall, underinvesting in risk assets was detrimental to the portfolio, as high-yield bonds delivered robust gains.

During the past six months, we have broadened our outlook beyond the United States and accumulated regional laggards such as Switzerland, Japan, and the United Kingdom which is still trading at a discount. Our main convictions generated solid returns; however, we decided to balance risks on the technology sector after its stellar performance. The S&P 500 Information Technology index, trading at a 30 times forward price-to-earnings (P/E) ratio, is currently above its historical average, and we foresee a deceleration in earnings growth for the upcoming quarter. While we remain strongly positive on the sector, we adjusted our view in June.

Looking ahead with optimism to the second half of the year, we expect the market leadership to broaden further, albeit with a pause in US equities. We also foresee a slight deceleration in US growth, which could prompt the Fed to cut rates by year end. Nonetheless, geopolitics will remain the main risk over the coming months, particularly with the upcoming US elections in November potentially increasing market volatility. Hedge funds appear suitable to building portfolios that are resistant to market fluctuations.

In France, the victory of the leftist coalition in the parliamentary elections is likely to result in political gridlock, leading to a government with a minimal policy agenda focused on maintaining the status quo rather than pursuing significant reforms. Within European equities, we continue to prefer Swiss and UK equities, which are benefiting from reduced political risks, a cyclical economic recovery, and accommodative monetary policies.

Strategy

A summer liquidity surge unfolding

Following USD 300 billion of liquidity flowing in to support markets in May, an additional USD 150 billion was added in June, helping to underpin the rally moving into the summer.

With former President Donald Trump’s polling numbers rebounding in the seven key battleground states that will decide the outcome of the 2024 US presidential elections, and betting markets placing a 52% probability of a Trump victory in November, President Biden has begun deploying policy tools in an attempt to narrow the gap, much like former President Obama did in 2012 to secure a second term in office.

As voters are citing inflation as a key economic concern, the Biden administration has released strategic reserves of gasoline, pushing gas prices down by 5% since May ahead of the summer driving season. Unbudgeted student loan forgiveness has contributed to a USD 400 billion widening in Congressional Budget Office deficit estimates since February, while the Internal Revenue Service looks set to process over USD 80 billion in tax credits this summer to support households and small businesses in the run-up to the July Democratic National Convention.

Beyond this, with nearly USD 1.1 trillion between the US Treasury’s General Account and the Fed’s Reverse Repo facility, we estimate that between USD 400–800 billion in liquidity is available to be deployed going into the election, mirroring the USD 400+ billion that fuelled the nearly 10% rise in the S&P 500 from the May lows.

Much as the rally from the October 2023 lows has been led by a combination of surging liquidity and a technology-driven earnings recovery in the S&P 500, the summer months should see not only another liquidity surge as outlined above, but also a broadening of earnings growth momentum beyond the technology sector.

Recall, the tech sector’s outperformance resumed following its earnings contraction in late 2022 and early 2023, with earnings’ recovery peaking in early 2024. However, non-technology sectors saw earnings contract through most of 2023 but now look set to accelerate as earnings are reported this summer and into 2025.

Therefore, with the summer liquidity surge unfolding as expected, the coming earnings season beginning in July should confirm this broadening in the earnings growth momentum trend and provide the catalysts for the next leg to the 2024 equity bull market in the months ahead.

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