1. US 10-Year yields hit 5%.

Many analysts expect the Federal Reserve to raise interest rates twice this year.
“Inflation doesn’t appear on track to fall all the way back to the Fed’s 2% target.”
HSBC doesn’t expect higher rates by the end of this year to be followed by a rapid pivot back to cuts, given the resilience in US economic momentum.

Below: The market has already repriced a meaningful amount of tightening, and provided the pace is gradual and data dependent, equities have historically absorbed such a path during a healthy earnings cycle.

2. Europe’s uptrend starts to crack.

Technically, the deterioration that began last week has deepened. After breaking below the lower rail of its ascending channel, the index lost its 50-day moving average and fell to its lowest since early July before finding buyers around the 100-day near 636 points. The point-and-figure chart echoes that loss of momentum, with the index reversing from the 660 area into a column of Os. For now, 636 is holding.
Fundamentally, the Stoxx 600 is trading at about 14.5 times forward earnings and Europe's median EPS growth has not been this high since 2022...

3. “Gas hurts Europe less than people think”.

Conventional wisdom says soaring energy prices is bad news for European companies, given the region's dependence on imported energy and its industrials-heavy corporate sector.
But strategists at Morgan Stanley argue that the link is much weaker than it was during the 2022 energy crisis and that many companies are now better placed to absorb rising energy costs.
The strategists note that sectors such as capital goods, aerospace and defence and autos have only low single-digit direct energy costs as a percentage of their cost base.
Meanwhile, sectors including energy, utilities, banks and parts of metals and mining could actually benefit from higher energy prices, creating earnings upgrade potential.
“We believe this can be sustained as long as energy prices don't rise to recessionary levels (e.g. Brent > $125/bbl).”

Below: Europe's median EPS growth has not been this high since 2022...

4. The AI price war intensifies.

Without sustained evidence that the return on the incremental dollar of capex will be justified by monetizable demand, hyperscalers will struggle to keep on spending. The deceleration will ripple through the supply chain, hitting today’s market winners the most.
Earnings show no cracks yet, but slowing growth raises the risk that lofty expectations will prove even harder to clear.

That argues for gradually broadening exposure beyond tech-heavy industries.
The dot-com era offers a useful precedent for how that rotation could play out. The cap-weighted index, dominated by tech stocks, massively outperformed the equal-weight index into the then-market peak in March 2000, which was soon followed by a deceleration in tech investment spend. That, in turn, led to the cap-weighted S&P 500 dramatically lagging the equal-weight index in the years that followed.
Stocks’ rebound from the tech implosion and the economic recession that followed was led by blue-chip stocks across financials, health care, consumer staples, industrials and energy.
Below: Equal-weight index lagged amid the capex boom but outperformed after the bust.

5. Higher gas prices represent a likely EPS upgrade tailwind for Utility stocks.

We see a more positive readacross from elevated gas prices into the Energy Security theme and the associated multi-decade investment pathway for Utilities as part of the 'new growth era'.

“Reducing imported fossil fuel's role in European Energy requires accelerating the electrification of energy demand, deploying more clean power generation, adding battery storage for flexible generation and investing in electricity networks to enable the future system and remove current congestion bottlenecks.”

Below: The European Utility sector is very oversold. A nice opportunity to get in.

Not a subscriber yet?