Markets are shifting focus away from inflation towards growth, with a slightly less disruptive economic picture for Europe and a more optimistic view on China.
This is creating strong rotations: outperformances for China and EM were the most visible trends, followed by the big reversal in the dollar’s strength. Intra-market rotations also materialised, with cyclical stocks favoured over defensive names in Europe while in the US, expectations of a less aggressive Fed supported tech stocks. Going forward, four themes should be crucial: (1) inflation/growth balance; (2) central bank (CB) actions; (3) dollar weakening; and (4) the corporate earnings trajectory. Any negative growth and earnings surprise could drive markets lower while there are no short-term triggers for upside at current valuation levels.
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