We believe the current uptick in US equities are temporary. US equities are pricing in only less than 50% of a US recession. In the past 5 downturns, S&P500 on average fell 37% peak to trough. Last 3 times, starting forward P/E was 19x, and trough P/E 12x. So far, from the February market peak to last Friday close, S&P500 is down 13%, and currently trades on 19x P/E. These valuations look suitable for the start of a downturn, not the end. The frequent flipflops in policy had led to irreparable damage to US consumer confidence & corporate decision making. Average tariffs in US now stand at 27% in a scenario where there is no import substitution & rerouting from other cheaper destinations. Average tariff stands at 18% if there is import substiution & reshoring of Chinese imports in US to other countries. Also the fact the US bond markets are effectively broken seeing the daily volatility does not augur well for US equities health too. Term premiums have a lot of scope to go up higher from here. Flow wise, US equities again saw 6.3 BN USD outflow last week against MSCI Europe which saw inflows of 6 BN USD. We are yet to see the worse in economic hard data and hence the downside on US equities is still not over. There might be buyers emerging in H2CY25 but we might see a lower low in H1 first. In summary it might get worse for US equities before it gets better.
