Equities

The Hamas attack against Israel, timed almost 50 years to the day after a similar surprise attack on Yom Kippur of 1973, has evoked parallels with the 1970s. Parallels not only with Middle Eastern geopolitics then and now, but also with inflation, economics, and financial markets. In this report, we explain what went wrong in the 1970s and whether the mistakes will be repeated. Plus: the sharp sell-offs in some Latin American currencies are reaching a potential turning-point.

Q3-2023 is expected to mark the end of the earnings recession for the past three quarters, opening the door to positive earnings growth. Whether that would be sustainable or will sputter once the recession settles in as expected in 2024 remains to be seen. However, much of earnings growth is already priced in.

More equity volatility is coming in the short run. Trump’s nomination looks to be smooth, which marginally reduces the incumbent party advantage and increases policy uncertainty.

Yields remain the force dominating the evolution of markets. A peak in yields would help European assets rebound, but the war in the Middle East could push higher energy prices, with negative consequences for Europe.

Investors underestimate the likelihood of the war in Israel spilling outside of Gaza, and engulfing wider swaths of the Middle East, endangering energy supplies. Stay overweight Energy and Aerospace & Defense.

US monetary policy is restrictive, as evidenced by a falling jobs-workers gap. The reason that unemployment has not risen is because labor demand still exceeds supply. That will change in the second half of 2024 when the US economy succumbs to recession. Investors should increasingly favor bonds over stocks.