Market recovery gains traction
171 Monday, 5 May 2025 12:47
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The rebound in US equities has been almost as fast as the drawdown in early April, suggesting that too much pessimism was priced in. Macro data releases and the ongoing earnings season have been supportive, with no signs of a significant consumer cutback so far, despite lingering uncertainties on trade. In our asset allocation, we started to re-weight US equities on April 8 and turned Overweight on April 10. Our multi asset strategy (Sharpe 1) was up 1.1% last month.
On the data release front, there are no indications that the US is close to a recession. Last week, we had additional insights into depressed consumer and CEO confidence in the US, though this reflects the recent uncertainty and the equity market correction. On a positive note, the ISM manufacturing business survey was better than expected, with new orders rebounding compared to the March reading. Also, job creation remained strong last month in the US, with net job creation at 177k, above the average of the past three months.
- In the euro area, inflation for April was slightly above expectations, at 2.2% (core CPI at 2.7%), but technical factors might contribute to explain a significant part of it (Easter break was in March last year and in April this year). In our view, this is unlikely to derail the ECB’s dovish stance.
- In the report, we have a look at the most recent inflation figures in Switzerland, where 2-year interbank rates have turned negative. Is it an advanced indicator of what lies ahead in the euro area? Time will tell us, but we continue to recommend steepeners in euros to leverage additional ECB rate cuts going forward.
On the earnings front, more than 70% of the companies listed in the S&P 500 have reported earnings as we go to press. The aggregate earnings surprise is above 8% according to Bloomberg (i.e. for the 358 companies that reported quarterly numbers, earnings were 8% above consensus expectations). Earnings growth is even more impressive, up 12.5% versus Q1-2024. Microsoft and META platforms delivered upbeat figures last week.
- In Europe, less than half of the companies listed in the STOXX Europe 600 have reported quarterly earnings. The aggregate earnings surprise is about 7% (with 220 companies having reported quarterly earnings as we go to press) but earnings growth is negative (-8.3%) so far. The energy sector in Europe, on which we stay Underweight, has been the largest detractor to EPS growth in Europe in Q1.
Going forward, we believe that falling oil prices, a dovish Fed tilt, and likely trade deals with some Asian countries (even potentially with China), might provide additional support for risk assets.
- Over the weekend, some OPEC+ members agreed to accelerate oil production hikes in June, by 411,000 barrels per day. According to Reuters, Saudi Arabia is pushing OPEC+ to accelerate the unwinding of earlier output cuts to punish some members for poor compliance with their production quotas. This is a positive for consumers and energy-intensive companies globally. Brent oil prices have fallen almost 20% year-to-date.
- With regards to the FOMC meeting this week, we believe that Powell should stay on the fence as it’s too early to call for rates cuts or not. Friday’s job report should be seen as another evidence that the Fed better stay in wait-and-see mode at this juncture. But falling oil prices will have disinflationary effects on the core CPI and a dovish bias might emerge from the meeting.
On thematics, we revisit Kepler Cheuvreux’s Ukraine reconstruction basket. Developed in coordination with our equity analysts, quants and specialist equity sales, it has a bias towards material and industrial stocks in Europe. It should benefit from a potential conflict resolution between Ukraine and Russia. The basket is up 40% since late-October 2024 and has recovered swiftly from the March-April market turmoil.
- The “economic partnership” deal that was signed last week between Ukraine and the US is a step forward towards conflict resolution, in our view. It will give access to Ukraine’s critical minerals and natural resources, ending weeks of complex negotiations with the Trump administration.
Week ahead: the FOMC meeting will be the key macro highlight of the week.
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