Equity market, high volatility and sector rotations. Stocks increasingly driven by corporate results

The US-Iran conflict and the impact of artificial intelligence have had a major effect on the stock market, but the US economy has responded with robust consumer demand and solid corporate results.

by Filippo Garbarino, manager of the Lemanik Global Equity Opportunities fund

The US-Iran conflict has heightened the market’s sensitivity to shocks and inflationary risks, but the backdrop remains generally supportive for equity markets, even if we expect returns to be increasingly driven by corporate results rather than by multiple expansion. In April, global equity markets rebounded thanks to a temporary ceasefire between the US and Iran and solid corporate earnings. Equity performance showed broad dispersion as investors closely examined the potentially disruptive effect that artificial intelligence could have in some sectors, particularly application software. These dynamics led to significant volatility across sectors and rotations between them.

From a macroeconomic perspective, recent data have pointed to a stabilization in the US labour market, with both hiring and layoffs remaining contained. The economy has proven relatively resilient, supported by robust consumer demand and solid corporate results. The Fed now faces a more complex backdrop: while labour market conditions have normalized, the war in Iran and the resulting rise in energy prices have increased the risks of higher inflation, making the pace of further easing more uncertain and likely more cautious than previously expected.

The outbreak of the war with Iran has added a new element of uncertainty, mainly because of higher oil prices and disruptions to maritime traffic in the Strait of Hormuz. Although the recent ceasefire has eased some of the immediate pressure on energy markets, the conflict has heightened the market’s sensitivity to geopolitical shocks and short-term inflationary risks. We view the current backdrop as generally favourable for equity markets.

The strength of corporate earnings, together with ongoing share buybacks, should continue to provide support for market performance in the months ahead, although we expect returns to be increasingly driven by corporate results rather than by multiple expansion. The fund’s portfolio is currently trading in line with the market on a valuation basis. At sector level, the portfolio has no exposure to banks, technology hardware, non-discretionary consumer goods, pharmaceuticals, real estate, energy and utilities. The portfolio is overweight financials, industrials, chemicals and discretionary consumer goods. The technology sector is underweight, while healthcare is neutrally weighted.