We remain tactically LONG
We remain tactically LONG. Middle East newsflow remains volatile, but we continue to see renewed equity weakness as a buying opportunity, provided the conflict does not broaden into a more systemic escalation involving other major powers directly (NOT OUR BASELINE). Unless that tail risk materialises, we would expect markets to keep looking through the geopolitical noise and rotate back toward the usual macro and fundamental catalysts, keeping us firmly in a buy-the-dips regime.
Earnings season is about to start. We expect a solid set of results to help support the recent relief rebound. We also continue to see also room for a supportive repricing of policy expectations and light positioning. We retain our baseline of three Fed cuts this year, although risks remain skewed toward only two. Even so, current market pricing still leaves scope for a more supportive rates backdrop, which should remain a tailwind for equities.
From a regional perspective, we continue to prefer the US over the Rest of the World, supported by relative energy independence, a more resilient domestic backdrop and stronger earnings visibility, alongside potential support from flows as investor positioning normalises. By contrast, Europe remains more exposed to the energy shock, while EM should benefit from lower oil prices and a softer USD, although we still prefer the US on a relative basis.
From a sector perspective, we continue to favour Cyclicals over Defensives, while maintaining a Growth tilt. Materials and Semiconductors remain our preferred exposures. We also maintain a LONG stance on Energy, which continues to offer a useful hedge despite the recent compression in the oil risk premium. Within Financials, we upgrade Banks to LONG (from NEUTRAL) and remain SHORT on Diversified Financials. Within Defensives, Utilities remain our preferred pick.
Strategically, we maintain our 12-month OVERWEIGHT view on equities. The recent de-escalation in the Middle East reduces the risk of a more severe and sustained macro shock, but some uncertainty remains and the path is unlikely to be linear. In the near term, markets should increasingly be driven by earnings delivery, policy expectations and the evolution of growth data, rather than by the pure geopolitical risk premium.
Cosimo Recchia
Senior Equity Strategist
Investment Research
Francesco Ponzano
Junior Equity Strategist
Investment Research
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