US equity sentiment has fallen to an all-time low, according to the latest Expert Investor Pan-European asset allocation sentiment survey. While most European investors are already underweight US equities, 48% of them intend to decrease allocation further.
As US equity bulls are far and few between, net sentiment (those planning to increase allocation minus those intending to decrease exposure) has fallen to an all-time low of -41% (see graph below). As recently as early December, when the ‘Trump rally’ was in full swing, sentiment was positive.
Since then, the S&P 500 has advanced some 15% even though the corporate tax cuts and infrastructure plans promised by president Trump are unlikely to come through any time soon. These policy initiatives were the initial trigger of the post-election equity market rally.
Luca Paolini, chief strategist at Pictet Asset Management believes US markets may have gone a little ahead of themselves now, as future GDP growth expectations are too optimistic.
“The consensus view on US earnings implies real GDP growth in excess of 3 per cent - which has not been seen in over a decade. This is in stark contrast with economic realities,” he said. “The onus is now on equities to justify their strong performance after a spectacular run, with suitably strong earnings numbers. Expectations are running high, particularly in the US in turn raising the risk of disappointment.”
“The consensus view on US earnings implies real GDP growth in excess of 3 per cent - which has not been seen in over a decade. This is in stark contrast with economic realities” - Luca Paolini
European fund buyers are therefore sticking to their old favourite: European equities. Net sentiment has reached +54%, the highest in more than two years. While fund buyers in all European countries are sceptical about US equities, with less than 10% of poll respondents in 12 out of the 13 countries surveyed planning to increase exposure, European equities are popular everywhere.
And that’s the case even though the strength of the euro is casting a shadow over earnings prospects for the region.
“The second quarter earnings season makes clear that currency movements will become an important variable going forwards in the relative earnings performance between regions,” said Patrick Moonen, a multi-asset strategist at NN IP.
He added: “Looking at estimates for next year, earnings momentum (upgrades versus downgrades) has turned negative in the Eurozone at -0.09 and has fallen below that of the US at +0.03 for the first time in a year. However, the Eurozone’s domestic economy is growing faster than originally expected and this should buffer the negative impact of the strong Euro somewhat.”