US mega caps significantly outperformed the rest of the US markets in the first half of the year, driven by better-than-expected economic activity, AI exuberance and superior earnings. Looking ahead, we see a potential for a rally-broadening, which will not be linear and is likely to have multiple legs.
Some early signs of this rotation materialised recently after the July CPI report raised the chances of a Fed rate cut in September, while most recently fears on restrictions on the chip industry further supported this trend. This opens up opportunities into areas and segments (small caps, Europe, Japan) that have been left behind. Earnings trajectory is now key as well as themes such as:
- Mild deceleration expected in the US in the second half. Economic data and surveys point to this direction. The main feature of this deceleration would be a rebalancing in labour markets, weakening consumption and the dichotomy between affluent and low-income consumers.
- Little room for errors in monetary policy. Cutting rates too early risks inflation resurfacing later, while delaying cuts may require sharper reductions in the future. Hence, central banks including the Fed, the ECB and the BoE are being patient and are basing their decisions on incoming data, which according to us confirms the disinflation path.
- Fiscal profligacy and high levels of govt. debt will affect rates. Both Biden and Trump are likely to be fiscally expansionary. As we get closer to the US elections, the narrative on how deficit spending will affect borrowing costs in long term will likely get louder. To promote self-sufficiency and domestic economic growth, Europe may need to boost investments in the region.
You can now read the full whitepaper at the link below
