Equity strategists at JP Morgan remained “constructive” on equities, but predicted that leadership in the stock market would shift towards cyclicals going into year-end.
Critically, bond yields in both the US and Germany appeared to be finding a floor, Mislav Matejka said in a research note sent to clients.
He added that gains in the US dollar appeared to be stalling, highlighting how shorts against the Greenback appeared to have been “largely taken out”.
“Generally, stronger USD is a problem for reflation trades, for Cyclicals and for EM in particular, and any softening there would be welcome,” he explained.
Not only that, defensive leadership in stocks was already quite advanced, so the present time did not seem ideal to him for entering defensive trades.
And while forward earnings per share for energy, mining and banks had risen by 50%, 46% and 26% from the first quarter price relative highs, those three sectors had lost 10-30% in price in the meantime.
“Since Q1, Energy forward P/E is down nearly 40%, to 8.4x, Mining down nearly 35%, to 6.9x, Banks down 20%, to 8.9x, and Autos down 25%, to 6.9x.”