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MarketScape · 08.14.23

A Touch of Over-Optimism with Equities Globally

Global equities have performed well in July and August, but we think over-optimism on U.S. earnings growth in the coming years along with challenging economies in Europe and China merit caution by investors.
  • Equity Insights
  • Factor Investing
  • Markets & Economy
Key Points
U.S. Earnings Growth Projections Likely Optimistic
Economies are Stalling in Europe and China
Inflation, Economic Good News Likely Already Priced In

Though off the highs achieved at the end of July, global equity markets remained comfortably in positive territory over the past 30 days led by non-U.S. equities. But we expect tempered U.S. earnings growth. The economy in Europe is notably slowed, and China continues to struggle. We see evidence of complacency and overoptimism within equities, leading us to increase slightly our underweight to stocks globally. Let's take a closer look.


Not only are valuations reflecting optimism in U.S. stocks, but optimism is also showing up in earnings expectations. Consensus projections call for low double digit earnings growth in 2024 and 2025, implying 2023 earnings are substantively below a normalized level. We disagree. Profit margins and earnings for this year appear on track with the pre-pandemic trend, not a trough level off of which to expect more rapid growth.


With our view that economic growth still faces headwinds from a slowly softening consumer plus the cumulative effect of central bank tightening on activity levels, we see earnings expectations as too high for next year. This suggests the real forward price to earnings multiple is actually somewhat higher. In Europe, while the European Central bank's stance against inflation softened somewhat in the past month, so too has the growth outlook in the region.


Further, China's economic data continues to worsen, prompting speculation of increased government stimulus, aiding recent market performance. But we remain skeptical it will be of a size to substantively alter intermediate term fundamentals or sentiment. In our global policy model, which guides allocation in our multi-asset portfolios, we further modestly lowered risk taking in our tactical allocation by reducing 1% in each developed market equities outside the U.S. as well as emerging markets, increasing our global underweight to stocks, adding the proceeds to inflation linked bonds.

Main Point

We believe that stocks have prepaid for a lot of good news on economic growth and inflation.

With minimal expected gains in global equities over the next year, we prefer high yield bonds to develop market equities and natural resource stocks to emerging market equities.


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