In terms of positive (yang) drivers the macro economic backdrop has been supportive of risk appetite, with US consensus 2024 GDP forecasts experiencing sequential upgrading that has resulted in a large gap between US and other regional forecasts.
Exhibit 1: Superior US 2024 GDP growth forecasts
US 2024 EPS growth rate estimates are the highest and most stable
In Exhibit 2, we compare the trajectory of US 2024 consensus EPS growth forecasts to other regions. With an estimated growth rate of 12.2% in 2024, US equities have a superior growth rate to Global ex US equities. Importantly, the US growth rate estimate has remained stable while the Global ex US forecast has been drifting lower since Q1 2024.
Exhibit 2: Superior US 2024 EPS forecasts compared with other regions.
The negative (yin) headwinds include … moving to a significant valuation premium
The significant outperformance of US equities over the last 10+ years has driven the PE premium (relative to Global ex US valuation) to a 53% premium. This compares with a peak valuation premium of 35% at the time of the dot com/TMT bubble. It is also worth noting that US equities had the same PE rating as Global equities in 2010.
Exhibit 3: Sector EPS growth contributions
The maintenance of interest rates above the ‘neutral’ rate
The upgrading in Year End 2024 US interest rate expectations (due to the stickiness of services inflation) suggests that interest rates remain above the neutral rate.
Exhibit 4: US interest rates remain in restrictive (above neutral) territory
Stripping out the Mag 7 technology stocks US profitability has been flatlining
While aggregate market level margins have been improving this has positively distorted by the contribution of the Mag 7 stocks. Ex the Mag 7 net margins have been flatling over the last couple of years
Exhibit 5: A divergence in net margin profiles
Source: Wilshire Indexes and FactSet and Federal Reserve. Data as of June 21, 2024.
