Danske Bank’s Danske Research Team reports a strong rebound in global equities, with the S&P 500, Nasdaq, Stoxx 600 and Kospi all posting solid gains despite a recent Fed hike and further tightening priced. The team argues that robust consensus earnings growth of 35% and rising estimates make a sustained equity sell-off difficult, advocating a barbell strategy favouring global tech over industrials as valuations adjust.

AI-led rally and barbell strategy

“Equities rebounded strongly on Thursday. The S&P 500 advanced 1.2%, the Nasdaq gained 1.7% in its best session since early August, the Stoxx 600 rose 0.9%, and Kospi is surging a remarkable 2.7% at the time of writing.”

“We must therefore conclude that a Fed hike (along with the four additional hikes priced over the next 12 months) was not the end of the world for risk assets. The gravitational force on equities remains higher.”

“Consensus earnings growth of 35% this year, with estimates still trending upward, makes a sustained equity sell-off, or even a pause, increasingly difficult. As earnings compound, valuation multiples contract rapidly, which provides a cushion to higher rates.”

“As the regional performance reveals, the AI trade was once again the standout. Semiconductor and memory stocks led the advance, but big tech also posted solid gains. Intel, AMD and Micron all rallied between 6-8%.”

“On the back of the reasoning above, we advocate a barbell strategy: buying global tech with historical earnings growth and undemanding valuations, financed by an underweight position in global industrials, where valuations remain elevated despite significantly weaker earnings.”

“Notably, industrials were among yesterday’s weakest performers despite the broader risk-on backdrop, perhaps signalling that investors are becoming increasingly selective.”