Can We See More Relief? In our view, the combination of stronger seasonals, a falling dollar/10-year yield, oversold sentiment/positioning indicators and month/quarter end flows continue to make ~5500 support for a tradeable rally in the near term. As expected, lower quality, higher beta stocks have led the market higher after it reached the lower end of our 1H trading range (~5500-6100). Keep in mind that while the S&P was down only 10% in this correction, many stocks experienced 20%+ drawdowns. Of course, we are watching the labor data, PMIs, and earnings revisions carefully as signposts for a more durable rally, but would view a clear break below ~5500 as a potential sign that growth could be deteriorating faster than expected.
Policy Cross Currents...Last week's FOMC meeting appeared to come as a relief to market participants as two cuts remained in the dots for both this year and next (some had expected a cut to come out for this year). Further, Chair Powell seemed to downplay concerns about inflation, perhaps offering a bit more emphasis on the growth side of the mandate than some assumed going into the meeting/presser. The Fed also made the decision to slow the pace of balance sheet runoff, a development that came sooner than our economists (and the consensus) expected.
In short, this was a less hawkish meeting than many equity investors expected based on our conversations. Looking ahead, investors are also very focused on the April 2nd reciprocal tariff deadline (see Tariffs: The Reciprocity Principle and The Tariff Playbook: Mitigation Strategies). While this deadline could offer some clarity on tariff rates and countries/products in scope, it's likely a starting point for tariff negotiations as opposed to a clearing event. Bottom line, a Fed put seems closer to being in the money than a Trump put though it probably would require material labor market weakness, a headwind for stocks initially given the once again very positive correlation between equities and rates ( Exhibit 1 ).
US Vs. International Equities...As discussed last week, context is important in terms of the relative performance between the US and international equities. For one, recent relative underperformance of the US is fairly benign in a longer term context—S&P 500 vs. MSCI ACWI Ex-US relative performance has just come back into a long-term trend line that has held for the past 15 years.
In other words, US vs. rest of world performance is still in a strong uptrend. Further, relative underperformance of the US has been tied to weaker relative earnings revisions, which have partially been due to the lagged impact of a strong dollar in 4Q. As we show in our note this week, this has been particularly true for relative earnings revisions vs. Europe. Importantly, this dynamic may now be shifting as the dollar is down 5% since the January highs.
This should offer a tailwind for US revisions and is one reason we think relative performance versus international developed equities can swing back in favor of the US in the near-to-intermediate term. For more from our colleagues in Europe on this topic, see What Do Widening US Credit Spreads Mean For Europe? Finally, Mag 7 earnings revisions look like they may be bottoming, which could also support a rotation back to the US.
