Our Global equity strategists look at three factors that could feed a blow-off phase in stocks.
First, the character of the equity market advance may shift and a rotation out of defensives and into cyclicals could transpire. Since the previous market peak, defensive stocks have handily outperformed due to the drubbing in global bond yields. As the global bond bull market goes on hiatus at least for a while – a view that BCA’s Global Investment Strategy service has posited – defensive sectors may feel the heat.
Second, investors’ perceptions of improving global growth may be enough to move the needle in the still extremely oversold and under-owned cyclical sectors.
Third, there appears to be ample sidelined cash to flow back into stocks if a bear capitulation occurs and investors throw in the towel in order to participate in an advance. Tack on the recent flurry of global M&A activity encouraged by ultra-low bond yields and equity prices can vault higher.
Bottom Line: Further equity strength should be characterized as a high-risk, liquidity-driven overshoot phase in global stocks. While both the magnitude and longevity of such a phase are difficult to gauge, our best guess is that weak earnings, a hawkish Fed and geopolitical risks could spoil the party.
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