Special Commentary – Downgrading equities to neutral; upgrading fixed income

Highlights

We are making changes in our House Views, which has a tactical time horizon of 3 to 12 months, given a shift in the weight of the evidence.

• Downgrading equities from attractive to neutral as the equity risk premium (ERP) has dwindled to the lowest level since 2010 following the surge in interest rates and given the range of potential economic and market outcomes remains unusually wide.
• Upgrading fixed income one notch to just below neutral given the very sharp rise in yields over the recent month(s) which has made bonds much more competitive.
• These moves follow on top of our downgrade of small caps in early April to neutral, as well as our downgrades of the financials and technology sectors in March. Our sector overweights remain energy, staples, and REITs.
• Collectively, these moves take into account a downshift in global economic growth, stickier inflation trends, much more attractive bond yields, ongoing geopolitical risks as well as an aggressive monetary tightening phase. There is an increased risk that the Federal Reserve (Fed) will be unable to tame inflation without unduly slowing the economy.
• There are, however, some positive offsets which inform our view to not go underweight equities. These include the following: a U.S. recession is still unlikely near term, corporate earnings remain resilient, investor expectations are low, and a recent triggering of a technical price signal that has a very consistent and positive track record.
• We will continue to keep an open mind and follow the data as we consider future tactical moves.

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