By mid-year, we should see a rebound in the markets thanks to the growth associated with emerging markets and BRICs (perhaps MAVINS too?), as well as “accommodative” U.S. policy.
Goldman Sachs: US equities extended recent losses this week as macro concerns ranging from China tightening to European sovereign worries to US policy confusion continued to overshadow the strong earnings season underway. The S&P 500 is now down 3% since the start of the year, in-line with levels not seen since November 2009, and is trading at a 2010 P/E multiple of 13.4x. While the recent string of US economic data misses and Chinese policy moves have given us pause, we continue to believe that strong EM growth and accommodative US policy will lead equities higher by mid-year.
We continue to favour the globally- exposed cyclical sectors (Info Tech, Energy, and Materials) and stocks with BRICs exposure and a high degree of operating leverage. Since January 19th, Tech, Energy, and Materials have declined 8%, 7%, and 11%, respectively, our BRICs basket has dropped 6%, and the S&P 500 has fallen 6%. Our long/short Operating Leverage trade is up 30 bp during that time. We are reluctant to change our stance now that positioning and valuations look meaningfully more attractive than they did at the start of the year. The strong results from 4Q 2009 earnings season reinforce our core views.
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