We move to a tactical NEUTRAL stance (from previously LONG). The rally has been strong, and while macro conditions and fundamentals remain supportive, we think the near-term risk-reward has become less compelling. Part of the return profile has likely been pulled forward, raising the risk of earlier-than-usual profit-taking ahead of the more typical August/September window.
We will enter the reporting season with the bar set relatively high. Analysts have continued to revise earnings estimates higher despite a Q2 heavily shaped by the war in Iran, which speaks to the resilience of the underlying backdrop. At the same time, it leaves this market facing a higher hurdle ahead of results, with less room for upside surprises.
We do not expect a meaningful FOMO-driven extension of the rally, given that participation improved much earlier in the rebound. That makes the move healthier overall but also implies less incremental support from late performance-chasing flows.
A separate risk is that any broadening in market leadership could generate temporary weakness at the headline index level. While ultimately constructive, such a rotation could still bring a short-lived rise in volatility and would likely look more like a repositioning phase than the start of a broader sell-off.
That said, two supportive elements remain in place: valuations, while elevated, do not look overly stretched, and we continue to expect a further easing in geopolitical tensions, which should help preserve a constructive market backdrop.
From a regional perspective, Europe is now our preferred market (upgraded from NEUTRAL). We downgrade the US to NEUTRAL (from LONG). Although the US still appears fundamentally strongest, we do not think this is the right point to express that preference aggressively at the index level following the recent rally. We remain NEUTRAL on EM and SHORT Japan.
From a sector perspective, we also move to a more balanced stance, moderating our cyclical exposure and becoming more agnostic on style (from a previously strong cyclical Growth bias). We are not turning defensive outright, but after the recent rally we think the near-term risk-reward for Cyclicals is less attractive, particularly with expectations already elevated.
Strategically, we maintain our 12-month OVERWEIGHT stance on equities. The recent de-escalation of tensions in the Middle East reduces the risk of a more severe and prolonged macroeconomic shock, even if some uncertainty remains and the path ahead is unlikely to be linear. That said, we continue to view any meaningful market weakness as a buying opportunity.
Cosimo Recchia
Senior Equity Strategist
Investment Research
Francesco Ponzano
Junior Equity Strategist
Investment Research
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