Strategists at Bernstein Societe Generale recommended buying Indian stocks with upward earnings revisions to navigate the market’s lofty valuations https://t.co/R3N4rORlx1 ...

Market Overview & Economic Concerns - Earnings estimates are declining, with decreases observed in almost every week over the past 10 months, specifically since April [1][2] - The economy is slowing, evidenced by economic surprise indices and retail sales data [3] - Market's high valuation, trading at over 22 times earnings, more than three times sales, and more than five times book value, raises concerns [3] - Risk-reward equation favors risk, suggesting a defensive posture [4] Investment Strategy & Defensive Positioning - Recommends raising cash, suggesting a 10-15% cash position is currently yielding returns [4][5] - Stock market upside potential is estimated at 3-5%, while downside risk could be 15% or more [5] - Suggests gold as a defensive play, noting its outperformance of the stock market since the 2022 bear market lows [6][7] - Advocates for at least a 5% allocation to gold, potentially more, given economic and geopolitical uncertainties [7] Macroeconomic Factors & Policy Impact - Wage inflation is a real factor impacting businesses [9][10] - The timing of potential Federal Reserve rate cuts is uncertain, with conflicting signals from Fed officials [10] - Concerns exist regarding the impact of the tax bill on the budget deficit [11][12] - Maintaining some cash enables investors to avoid selling at market bottoms and provides opportunities to buy during downturns [13][14]

Investment Rating - The report maintains an "Overweight" rating for Capital Goods and Software sectors, indicating a favorable outlook for these industries [57]. Core Insights - Leading indicators suggest a stronger earnings backdrop than anticipated, with high-single-digit EPS growth projected over the next year [4][9]. - Earnings revisions breadth has improved significantly, moving from -25% in mid-April to -9%, indicating a positive shift in earnings expectations [4][9]. - The Non-PMI Leading Earnings Indicator points to mid-teens EPS growth by the first half of 2026, driven by stable demand and reduced material costs [4][9]. - A weaker US dollar, down 11% from January highs, is expected to provide additional support for US earnings trends, with further downside anticipated [4][9]. Summary by Sections Earnings Outlook - The main earnings model forecasts high-single-digit EPS growth for the next year, supported by improving earnings revisions breadth [4][9]. - The Non-PMI Leading Earnings Indicator suggests mid-teens EPS growth by 1H26, driven by demand stability and lower material costs [4][9]. Sector Preferences - Capital Goods and Software sectors are highlighted as key beneficiaries of a weaker dollar, with significant inverse correlations between earnings revisions breadth and the dollar [16][21]. - Capital Goods are expected to benefit from infrastructure build-out, while Software is positioned to leverage GenAI for cost efficiency and revenue growth [13][15]. Market Dynamics - The report emphasizes the importance of earnings revisions breadth as a driver for industry group outperformance, particularly for Capital Goods and Software [12][22]. - The US equity market is preferred over international equities due to stronger earnings revisions in the US compared to Europe and Japan [22]. Financial Sector Insights - The Financials sector is viewed positively, with expectations of a stabilizing M&A environment and resilient consumer conditions [31][33]. - Companies are leveraging AI to enhance operational efficiency, which is expected to contribute positively to earnings growth [37][39].

Investment Rating - The report maintains a trading range for the S&P 500 between 5000-5500, indicating a cautious outlook on the market [4][6][11] Core Insights - The dispersion of earnings per share (EPS) revisions is increasing, suggesting that the upcoming earnings season may act as a rotational catalyst rather than affecting the index level [4][25] - The report emphasizes the importance of identifying high-quality stocks in industries that are less risky, such as Transports, Materials, Pharma/Biotech, and Tech Hardware [4][25] - There is a notable uncertainty surrounding tariff impacts, with many companies withdrawing guidance or adopting conservative approaches due to macroeconomic uncertainties [24][41] Summary by Sections Market Overview - The S&P 500 is expected to remain within the 5000-5500 range due to competing factors affecting both upside and downside risks [4][6] - Upside risks include a more dovish Federal Reserve, a broader trade deal with China, and improved earnings revisions, while downside risks involve declining business confidence and rising back-end rates [4][11] Earnings Revisions - Earnings revisions breadth is currently at -24%, the lowest since the 2022 growth scare, indicating a potential for further cuts to 2025/2026 EPS [41][42] - Cyclical and tariff-sensitive industries, such as Autos, Transports, and Tech Hardware, are leading the downward revisions [41][46] Sector Analysis - In Hardlines/Broadlines/Food Retail, companies are reducing exposure to China and absorbing about 50% of tariff costs, with no significant consumer slowdown observed [34] - The Tech Hardware sector is facing challenges due to tariffs, with enterprise spending remaining robust while small and medium businesses are delaying projects [37] - The Media & Telecom sector is experiencing weaker advertising spending, with companies adjusting guidance downward due to macro uncertainties [37] Investment Opportunities - The report suggests focusing on high-quality stocks in less risky industries, utilizing tools such as industry frameworks and quality stock screens to identify potential investments [4][25] - Specific companies identified as quality cyclicals include Halliburton, Schlumberger, and Ecolab, among others [47]