Key points:

  • Global equities have held up fairly well in light of the generally negative news flow, entirely driven by the United States, where stocks are up 9.6% year to date, while the euro area, Japan and emerging markets have underperformed. Broader style and sector leadership remains intact with cyclicals and growth outperforming defensives and value.
  • Earnings momentum remains robust with the second quarter earnings season posting positive growth and surprising on the upside across most major regions. The outlook remains on track with global earnings expected to grow by 9.8% in 2019, with the financial, technology and consumer discretionary sectors driving the bulk of the growth.
  • We remain overweight global equities given valuations appear to be less of a risk now, while earnings growth remains supportive underpinned by robust corporate activity. So far we see no meaningful evidence that recent developments on the trade front have spilled over into the outlook for earnings but believe it poses a key risk going forward.

Global equity markets hold firm despite recent developments

Global equity markets were flat over the past month. In the US, the S&P 500 index made new all-time highs supported by continued strength in the technology and consumer discretionary sectors. Euro area equites dropped by 3.9%, weighed down by political noise and stalling growth momentum, while emerging markets also continued to underperform. Year to date, global equity markets have held up fairly well in light of the negative news flow, and are up 4.2% entirely driven by the United States (where stocks are up 9.6%) while the euro area, Japan and emerging markets (EM) have underperformed. On the sector front, cyclicals remained in poll position over the past month with the healthcare (1.4%), technology (1.3%) and consumer discretionary (0.4%) sectors leading the pack. Defensives and commodity plays have underperformed, with consumer staples (-1.8%), telecom (-1.4%), materials (-2.8%) and energy (-1.3%) posting negative returns (Exhibit 2). Broader style leadership remains intact so far this year with growth winning and value continuing to underperform...

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