The second quarter of the year is becoming increasingly painful for tech stocks, recalling memories of the 2000s tech bubble bursting. The repricing of a more aggressive Fed stance has been brutal, real yields rose – the rate on 10-year TIPS has turned positive for the first time since 2020 – and on the nominal yields front, the US 10-year Treasury yield temporarily reached the 3% threshold, falling close to 2.75% on economic growth concerns. Rates are now at a level that could call for a recalibration of asset allocations. The key themes to follow to detect future market directions are:
- Stagflationary risks: The growth inflation battle is evolving unevenly at the global level, with the main theme being the shift from rising inflation and robust growth to lower growth and persistently high inflation. To account for this, our main scenario already pencils in regional divergences (technical recession for the Eurozone vs. US growth moving below potential, but no recession in 2022).
- China’s economic outlook: For 2022 we see growth at 3.5%, given the broad slowdown in economic activity since March, the extended lockdown in Shanghai and restrictions expanding into other regions. These will harm growth, particularly in Q2, while we expect a rebound in H2, thanks to more incisive policy support.
- Central banks: In their fight against inflation and, most importantly, to preserve their credibility, central banks will continue to focus on communication while de facto staying behind the curve. In this battle, the ECB is facing more significant challenges than other CBs: the impact from the Russia-Ukraine conflict and from financial conditions tightening will be uneven across countries. High debt levels and higher economic risks on the euro periphery may impact the ECB’s room for manoeuvre.
- Markets and earnings growth expectations: We believe earnings expectations remain too optimistic across the board. We expect US EPS growth to be in the 5-9% range, supported by buybacks (consensus is at +9.8%) and for Europe to potentially enter a profit recession.