European Equity Strategy: EU vs US - Back to Neutral

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European Equity Strategy: EU vs US - Back to Neutral

EU vs US – Back to Neutral

We take profit and close our overweight in US versus European equities.

In our Q2 outlook, we expected a significant rebound in markets and an even bigger bounce in US equities. We mentioned 3 main

reasons for our preference for US equities, 1) a widening growth gap, 2) the higher weight of Tech in the S&P 500 and 3) a lower

sensitivity to the effects of the Iran war.

We think all of the above drivers are becoming less relevant. In combination with the 6% outperformance of US equities since the

outbreak of the US/Iran war, we closed our relative preference for US equities versus European equities and turned Neutral on

Monday, 15 June (here).

1) Growth gap: While we anticipate a strong Q2 earnings seasons in the US, it is likely to be hard to beat the already very strong

Q1 growth rate of 25%. In Europe, fewer headwinds from the US dollar and strong growth in Energy earnings could

accelerate earnings growth into double digits in Q2. We thus expect the substantial widening of the growth gap to be

followed by a tightening. From an economic perspective, US data surprises have been less positive while European data

surprises have become less negative.

2) Tech recovery: We expected sentiment and positioning in Tech to recover in Q2. Since, the substantial inflows into Tech and

the high weight of the sector in the US have been the main drivers for the relative performance. Our US colleagues expect

strong earnings growth to further support US Tech. But already-elevated positioning and a sharp increase in supply over the

coming months could weigh on the sector‘s momentum.

3) Iran war: While it remains unclear whether a peace deal and – from a market perspective more importantly – a reopening of