We remain tactically LONG. While the rally has already been meaningful, we do not think the move is over. Our constructive stance rests on four pillars: improving geopolitical newsflow, supportive company fundamentals, still-light positioning, and a dovish Fed Funds repricing.
Our base case is still one of stabilisation rather than renewed escalation in the Middle East, which should allow the geopolitical risk premium embedded earlier in the year to continue to fade. At the same time, company fundamentals remain supportive. Earnings revisions have already improved, but we do not believe the market has fully exhausted the benefits of resilient corporate delivery. Positioning also remains relatively light despite the rebound, leaving scope for further re-engagement if the backdrop stays constructive.
Valuations are not standing in the way at this stage. The market remains materially less stretched than it was at the October peak, which limits the case for turning tactically cautious too early. From here, the clearest additional upside catalyst would be a more supportive shift in policy expectations. In other words, geopolitics, fundamentals and positioning should keep equities supported, while a favourable Fed repricing would provide the next leg of upside.
That said, one tactical risk to watch is that any broadening of the rally following the current phase of tight market concentration could lead to a temporary rise in volatility. We would view this less as the beginning of a sell-off and more as a phase of market repositioning.
From a regional perspective, we continue to prefer the US over the rest of the world, supported by relative energy independence, a firmer domestic backdrop, and stronger earnings visibility. Europe remains more exposed to the lingering effects of the energy shock, while EM may benefit at the margin from lower oil prices and a softer USD, although this is not sufficient to dislodge our preference for the US.
From a sector perspective, we continue to favour Cyclicals over Defensives, while maintaining a Growth tilt. Materials and Semiconductors remain our preferred exposures, while Energy continues to offer a useful hedge within portfolios.
Strategically, we maintain our 12-month OVERWEIGHT view on equities. The recent de-escalation in the Middle East has reduced the risk of a more severe and prolonged macro shock, even if some uncertainty remains and the path ahead is unlikely to be linear. That said, we continue to view any market weakness as a buying opportunity.
Cosimo Recchia
Senior Equity Strategist
Investment Research
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