Equity markets are still being buffeted by the ongoing trade spat between the US and China. The S&P 500 gained 1.7% on 10 April, helped by President Donald Trump dialing down his rhetoric and looking forward to making "great progress" with China.
Further volatility related to trade frictions is likely. But with the US first quarter earnings season about to get underway, we expect investors to start refocusing on the fundamentals, which are likely to support equities.
- The consensus forecast for S&P 500 first-quarter year-on-year earnings growth now stands at around 18%, according to Thomson Reuters data. Growth is expected to be broad-based, and tax changes have provided an estimated lift of seven percentage points. Companies also tend to guide expectations lower and on average beat estimates by 3%.
- First-quarter tech sector earnings are expected to grow by 23%, which should help investors put recent concerns over data privacy scandals and potential EU taxes into perspective.
- Valuations are less stretched. The trailing price/earnings ratio of the MSCI US Index has declined from 22 at the end of January to 19.6. This remains a 10% premium to the average since 1987, but is likely to decline further if earnings turn out as expected. This could make the market somewhat less vulnerable to shocks.
In a more volatile environment, we expect solid corporate fundamentals to help underpin equities, which in our view will grind higher. We remain overweight global equities, of which US stocks make up the largest share, while maintaining hedges against tail risks.
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