We turn tactical LONG from 1 January (NEUTRAL until then). Market volatility is likely to persist through year-end as investors take profits and await new US economic data following the shutdown. That said, we remain buyers on dips, expecting the rally to resume in January. Our constructive view is supported by a better-than-expected macro backdrop, easing geopolitical tensions, both solid household and corporates balance sheets, and seasonality. The main risks to our constructive outlook stem from any dramatic shift in expectations about the Fed's next moves or a significant reduction in liquidity.
We expect global equities to continue trending upward, even if stronger economic growth or slightly higher inflation in the US were to lead to an increase in Treasury yields. Historically, rising yields signal a healthy economy that supports stock prices. The last two major market downturns, 2000 and 2007, occurred alongside falling yields and deteriorating corporate fundamentals. Therefore, rising yields alone are not enough to stop a rally; market weakness emerges when several negative factors coincide, though the resilient macro backdrop should limit the downside.
From a regional perspective, we reiterate our NEUTRAL stance on the main regions. We see all regions to join in sync with the anticipated start of the year rally.
From a sector standpoint, we maintain a cyclical tilt, with a more agnostic approach to style (previously Growth bias). We are increasing exposure to traditional cyclical Value by going LONG Diversified Financials (previously NEUTRAL). Among Growth sectors, we are reducing concentration risk by going LONG Tech Hardware & Equipment (previously NEUTRAL). Pharma remains our favourite defensive sector.
Strategically, we reiterate our OVERWEIGHT stance on equities and view any market weakness as a buying opportunity. We expect the global benchmark to accelerate in 2026, driven mostly by high single-digit EPS growth. Already rich valuations will limit gains from multiple expansion, which was the main driver of last year’s rebound.
Regionally, we prefer the US and EM due to their predominance in the AI space and unique catalysts. Sector-wise, we favour Cyclicals over Defensives, leaning towards Growth-oriented stocks given our outlook for US GDP growth and inflation outlook. However, if the US economy grows more rapidly and inflation picks up, we would switch our focus to traditional Value stocks and take a more selective approach to long-duration sectors.
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