US Equity Strategy_ Where Macro Meets Micro

Key Points 1. Earnings Growth and Valuation * Earnings Growth Convergence: The report expects continued earnings broadening for 2025, with easier compares for economically sensitive sectors due to lagging effects of weaker production data over the past year. The S&P 500 EPS growth is projected at 10% in 2025, with a base case target of $6500 for the S&P 500 by year-end 2025. * Valuation: The report uses a proprietary fair value model, which accounts for the forces currently at work in the US equity markets. The fair value model suggests a range of 19.4-24.3x for the S&P 500 trailing P/E. * Sector Recommendations: The report provides sector and industry group recommendations for Q4, with overweight positions in Media & Entertainment, Transportation, Telecommunications Services, Energy, and Insurance, and underweight positions in Automobiles & Components, Commercial & Professional Services, Software & Services, and Consumer Staples Distribution & Retail. 2. Market Outlook and Risks * Market Outlook: The report expects a volatile bull market in 2025, with a base case target of 6500 for the S&P 500. The report highlights the importance of thematic fundamental tailwinds, such as AI and Trump policy, in identifying single stock and tactical alpha opportunities. * Risks: The report identifies several risks, including high trailing P/E, investor complacency, potential disruptions from changes in the rate and/or economic data trends, and geopolitical strife. 3. Sector Analysis * Communication Services: The report expects strong earnings growth in the Communication Services sector, driven by the "Magnificent 7" companies. * Consumer Discretionary: The report expects moderate earnings growth in the Consumer Discretionary sector, with a focus on companies with strong fundamentals and pricing power. * Consumer Staples: The report expects modest earnings growth in the Consumer Staples sector, with a focus on companies with strong balance sheets and operational efficiency. * Energy: The report expects strong earnings growth in the Energy sector, driven by higher commodity prices and improved production efficiency. * Financials: The report expects moderate earnings growth in the Financials sector, with a focus on companies with strong capital allocation and growth prospects. 4. Other Important Points * Productivity: The report highlights the importance of productivity improvement in driving earnings growth and valuation. * Buybacks: The report notes the ongoing trend of buybacks, which has contributed to the de-equitization of the market. * Capex: The report expects continued strong capital expenditures, which should support future earnings growth. * Quality Metrics: The report provides quality metrics for various market cap and style buckets, highlighting the importance of quality in investment decisions. 5. Conclusion The report provides a comprehensive analysis of the US equity market outlook for 2025, with a focus on earnings growth, valuation, and sector analysis. The report highlights several risks and opportunities, and provides valuable insights for investors.