US equities are entering Q3 earnings season on the back of a 50-bps rate cut by Fed, strong US labor market data & hopes of Chinese stimulus. But then there are headwinds of middle east tension as well as continued storm season in US amid a looming US election in Nov. Currently US equities are in a goldilocks scenario due to expected no landing of US economy. Slightly hot CPI and claims data this week reminded us that soft landing is a fragile concept, yet equities don't seem too bothered. In fact, the steady grind higher in market seems to confirm our recent view that post the sharp summer selling by systematic funds, the asymmetry had shifted to the upside again from a positioning standpoint. We look for S&P 500 earnings growth to decelerate modestly from 11.8% in Q2 to 9% in Q3. The slowing is driven by a narrow group of sectors and in our reading is well understood and temporary. Over half the slowing (2.8pp) comes from Energy (1.5pp) on the back of lower oil prices; another significant chunk from the widely anticipated continued slowing for MCG (Mega Cap Growth) & Tech (1pp). Growth for the rest should hold steady in the mid-single digits. Looking ahead, we see S&P 500 earnings growth reaccelerating in Q4 (16%) and through 2025 (11%) as the broader cyclical recovery continues to widen. The playbook for close US elections has historically been for the market to pull back (4-5%) starting a month before and then rally into year-end on a clear resolution. But this time it looks different considering the goldilocks environment & market positioning of systematic funds. We continue to expect S&P 500 make new highs towards 6000 by the end of CY24.
