US equity markets have fallen sharply in the past few weeks, reflecting a surge in policy uncertainty and growing fears of a sharp economic slowdown. On the other hand, due to German new chancellor Merz's recent announcement of a large fiscal stimulus package consisting of almost 1 TN new spending on defense & infra has led to European equities sharply outperforming US equities. From an earnings point of view, US earnings outlook is beginning to crack. The recent draw down in stocks is signalling to sell-side analysts that they need to bring down their annual profit outlooks even further from here. For Q1 2025, the estimated (year-over-year) earnings growth rate for the S&P 500 is 7.1% against 11.6% as on 31st Dec'24. At this point in time, 104 companies in the S&P index have issued EPS guidance for Q1 2025. Of these companies, 65 have issued negative EPS guidance and 39 have issued positive EPS guidance. The number of S&P 500 companies issuing negative EPS guidance for Q1 2025 is above the 5-year average of 56 and above the 10-year average of 62. US equity funds (-$2.8bn) saw outflows last week, especially notable because the second week of March typically sees large inflows; Europe ($5bn) continued its recent strong run with the strongest inflows in 8 years. CTAs have also been a major driver of European outperformance recently as they sharply increased exposure to the region since the start of the year. We do see L/S hedge funds yet to fully close their short positions that they opened up post the US elections. So not everyone has reduced their bearishness on Europe yet and so there might be more to go in terms of positioning catch-up for Europe.Also, positioning-wise, despite the recent inflows, the long-term gap between Europe and US remains wide. So, the region is far from crowded. Consequently, Europe may potentially attract more inflows as long as growth and activity fundamentals remain supportive. We believe that this developing theme of rotation of flows from US equities to European equities specially Germany is likely to be the theme of CY25. Not only because of German recent fiscal expansion announcements but also because of investor positioning. This will be compounded further by earnings downgrades in US compared to earnings upgrades in Europe. With current US administration policy focus on tariffs, US equities are in a tough spot & will discount corporate tax cuts as well as deregulation efforts.
