Equity strategy and market outlook – July 2023

Alastair George believes that a benign US soft landing scenario is increasingly priced into financial market expectations. Inflation fears are starting to ebb as producer price indices remain subdued, yet growth prospects in the US at least are for now on an improving trend even as European survey data disappoints. However, our estimates of the equity risk premium and price/book multiples suggest a US soft landing is fully discounted. US equity valuations are once again abnormally high and with expected returns lower than average. Therefore the ‘Goldilocks’ scenario for the US economy, with unemployment remaining strong even as inflation falls, appears to be firmly embedded in the pricing of US equities. European markets are trading close to fair value, reflecting weaker growth prospects and the near absence of global technology leaders, missing the current investor enthusiasm for artificial intelligence. We maintain a neutral outlook on global equities and believe US long-term government bonds remain attractive. With factory gate inflation having slowed sharply, we now expect government bonds to outperform as growth decelerates towards the end of the year. However, global equity valuations slightly above their long-term averages offer little directional guidance at a time of cyclically low earnings growth.

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