According to our U.S. equity strategists, to forecast that a weaker U.S. dollar will revitalize rather than simply stabilize profits on a broad-basis, it is critical for the rest of the world to demonstrate an internal demand impulse. That would signal that other countries can cope with currency strength, otherwise U.S. dollar depreciation would simply redistribute a shrinking global profit pie back to the U.S.
Profit redistribution may be enough to avert a serious crunch in stocks, but it is hardly fodder for a sustained breakout when P/E multiple compression is already underway.
The contraction in global exports, particularly in Asia, underscores that global final demand is still sub-par. Our global leading economic indicator, excluding the U.S., is still below the boom/bust line. The global ex-U.S. PMI has also sunk below the key expansion/contraction line. These subdued readings suggest that growth outside the U.S. is not yet on the cusp of a reacceleration.
That is consistent with the message from the bond and equity markets. Global stocks outside the U.S. are barely off their lows, suggesting that foreign profits remain weak. Treasury yields and inflation expectations remain historically low, and yield curves continue to flatten.
We remain wary of global deep cyclicals, but selling pressure in the domestic and interest rate-sensitive S&P consumer discretionary sector may have run its course, particularly if the long end of the U.S. yield curve continues to rally. Our U.S. equity strategist recommend lifting this sector to neutral from underweight.