But we do not think the likelihood of tighter credit conditions and lower growth is adequately reflected in US equity market pricing today. We see better risk-reward in high-quality bonds. Within equities, we recommend diversifying beyond the US and growth stocks in favor of emerging markets, including China. We also favor more defensive equity sectors like consumer staples and utilities.


Equities have rebounded following the recent banking turmoil.

  • The S&P 500 has gained 8% since the March low set in the wake of Silicon Valley Bank's collapse.
  • The S&P 500 is trading around 18x forward price-earnings, higher than pre-pandemic levels.
  • The VIX index of implied US equity volatility has fallen to around 16, below its historical average of 19.

But we think US equity market pricing is not adequately reflecting the risks to economic growth.

  • Credit conditions are likely to tighten further and slow US economic growth.
  • Historically, when the S&P 500 has traded above 18x, consensus earnings growth expectations are robust (14% on average) or the 10-year Treasury yield is less than 2%.
  • Today, we expect S&P 500 earnings to contract 5% in 2023, and the 10-year Treasury yield is 3.5%.

So, we recommend diversifying beyond the US and growth stocks.

  • We see better risk-reward in high-quality bonds than in broad US equity indexes.
  • Within equities, we favor emerging market stocks, which should benefit from China's recovery.
  • Our preferred equity sectors include defensives like consumer staples and utilities, which should be relatively resilient as growth slows.

Did you know?

  • The S&P 500 returned 9.2% in the first four months of the year. But its advance was largely driven by a handful of large-cap growth stocks. The equal-weighted S&P 500 returned just 3.3%.
  • Historically, narrow leadership has been a hallmark of late-stage bull markets rather than the start of a more prolonged upswing.

Investment view

We hold a least preferred view on global equities. Within the asset class, we recommend diversifying beyond the US and growth stocks given elevated valuations and rising risks to the US economy. We do, however, expect a positive performance from emerging market equities, including China and Asian semiconductor stocks, and select European themes, including German equities. At a global sector level, we like consumer staples, utilities, and industrials.


Content is a product of the Chief Investment Office (CIO).


Original report - Is the equity rally sustainable? , 2 May, 2023.