S&P 500 sell-off overshoots fundamentals
- After a volatile month, the S&P 500 gave in most of its gains year to date, losing 6.5% from its September peak. Global equities lost 6.4% over the month, with continued rotation in styles from growth to value and from cyclicals to defensives.
- Although reported profits look intact in the US, there have been concerns around corporate guidance and some big headline misses, although it doesn't appear meaningful enough to rationalize the price action. We believe the selloff was driven by a variety of perceived macro risks, while the extent of the sell-off appears to be related to technical factors.
- We remain overweight global equities in our cross asset allocation as the fundamental backdrop is still supportive and maintain our preference for US equities given the earnings backdrop underpinned by robust corporate activity.
Global equities lose 6% over the month; continued rotation from cyclicals to defensives
After a volatile month, the S&P 500 gave in most of its gains year to date, losing more than 6% from its September peak. Global equity markets lost 6.4% over the month, with Switzerland (-1.5%) posting the smallest decline, while Japan (-10%) and emerging markets (-6.6%) fell more heavily (Exhibit 1). At the sector level, utilities was the only sector to hold its ground (0.1%), while other defensive plays like consumer staples (-0.7%) and telecoms (-4.4%) also outperformed. Commodity sectors (energy -10%; materials -7.5%), industrials (-9.5%), technology (+8.4%) and the consumer discretionary (-7.3%) space performed poorly with limited differentiation. Continued rotation in equity styles from growth (-8%) to value (-4.5%) and from cyclicals (-7.2%) to defensives (-4.7%) was also visible over the month (Exhibit 2). October also witnessed a surge in volatility with the CBOE Volatility Index rising to 25, its highest level since the volatility spike in the first quarter of 2018.
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