US Equities Shine As Trade War Worries Grow

US equities shine despite war trade fearsSunset at Times Square

Global equities have held up fairly well in light of the generally negative news flow, entirely driven by the United States, where stocks are up 9.6% year to date, while the euro area, Japan and emerging markets have underperformed. Broader style and sector leadership remains intact with cyclicals and growth outperforming defensives and value. In this context, the Research team from AXA IM points that earnings momentum remains “robust” with the second quarter earnings season posting “positive growth” and “surprising” on the upside across most major regions.

Year -on- year (yoy) earnings growth for the S&P 500 came in at 25.3% with a positive earnings surprise of 5.5% and robust numbers across sectors. The increase was driven by healthy economic momentum, robust margins and tailwinds from US tax reform measures . Aggregate revenue growth was strong for the quarter . The 9.5% increase was driven by the commodity, industrial and technology sectors.

The euro area posted marginally better-than -expected aggregate earnings growth of 5.2% year on year. Growth was helped by a rebounding energy sector profits and a steady expansion in the financial space, which outweighed the disappointing numbers posted by industrials and utilities. Twelve month trailing earnings growth for global equities now stands at around 19%. Going forward, the outlook remains on track with global earnings expected to grow by 9.8% in 2019, with the financial, technology and consumer discretionary sectors driving the bulk of the growth.

AXA IM remains comfortable with their overweight in global equities overall.

Valuations appear to be less of a risk now, as global market forward multiples at 14.8x are below their long term average and the ongoing monetary policy normalisation appears to be well -flagged at this stage. At the same time, earnings growth remains supportive.

We maintain our preference for US equities given the earnings and technical backdrop underpinned by robust corporate activity. The S&P 500 trailing buyback yield is currently 2.6%, implying a total shareholder pay -out yield of 4. 4%.

Mergers and acquisitions deal flow has also been robust with over US $1.5t n of transaction value year to date in the US. So far we see no meaningful evidence that the recent developments on the trade front have spilled over into the outlook for earnings growth but it poses a significant risk going forward.