Sector Strategy: Neutral. We are Neutral on every sector but one. By our methodology, the majority of sectors are closely grouped in ranking. In some instances, a sector — e.g., Financials — is attractive from a valuation perspective, but has poor earnings momentum. Other sectors — e.g., Materials — have a better earnings outlook, but their valuation is unattractive.
Three More Sectors Moved to Neutral. We have downgraded Telecom to Neutral from Overweight based on a deteriorating earnings outlook. We have upgraded two sectors to Neutral from Underweight — Industrials (improved relative valuation) and Consumer Staples (improved relative earnings momentum).
Regional Strategy: Neutral to Negative. Russia is our sole Overweight based on the favorable combination of strong earnings momentum and attractive valuation. We have downgraded Australia to Neutral from Overweight based on a deteriorating earnings outlook, although the country’s valuation remains attractive.
A Cautious Equity Outlook. Both our sector and regional strategies are consistent with our broader concern about the equity outlook. In general, valuations seem elevated in an environment where expectations for earnings growth are being revised downward.
Figure 1: Sector Rankings
Source: Cornerstone Capital Group
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Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.