Strong growth backdrop faces mounting pressures
Markets remain supported by lower oil prices, powerful earnings growth, and signs of improvement in U.S. manufacturing. There is little evidence of recession risk, and the bar for the Federal Reserve to raise interest rates this year remains high.
However, markets have come a long way since late March, particularly following May’s gains. Some groups within technology, including semiconductors and memory stocks, are exhibiting bubble-like characteristics. At the same time, a pipeline of mega IPOs with large market capitalizations has been building, with the potential to drain liquidity as these deals come to market. These factors temper near-term enthusiasm and argue against a more aggressive overweight to risk assets.
The main threats to the rally include a rise in bond yields driven by above-target inflation and second-round effects from the oil price shock, and a slowdown in AI investment spending. First-quarter earnings helped ease concerns around a potential slowdown in technology capital expenditures, leaving the bond market as the primary source of risk.
Bond yields moved higher in early May but reversed course midmonth, ending only slightly above where they began. With wage growth relatively modest and most inflation pressure tied to the earlier oil shock, any sustained rise in yields is likely to be gradual rather than a sharp repricing, which may prove less disruptive to risk assets.
Natixis model portfolio positioning
We remain constructive on risk assets and are comfortable maintaining an equity overweight, though we prefer to keep that positioning modest given the strong rally in April and May, and the parabolic price action in some areas of the market.
We made one model trade in May, reducing our emerging market (EM) equity overweight to a slight underweight and reallocating proceeds into U.S. equities, resulting in a bigger overweight to the U.S. market. Developed international equities remain underweight, and overall equity positioning remains slightly beyond benchmark.
As part of this adjustment, we exited the iShares Latin America 40 ETF (ILF) after it remained under pressure and reached our risk limits. Concerns around rising inflation in Latin America and the potential for rate hikes contributed to underperformance. While we have moved to the sidelines, we continue to view this exposure as aligned with longer-term themes and will monitor it for future opportunities.
We also introduced two new positions. In U.S. equities, we added the First Trust RBA American Industrial Renaissance ETF (AIRR) to capture the theme of a U.S. manufacturing revival. In addition, we added the iShares MSCI Global Metals & Mining Producers ETF (PICK) to reflect rising demand for industrial metals as countries seek to secure strategic resources to support defense and manufacturing independence. We see more near-term upside potential in industrial metals than in precious metals, which informed the decision to add PICK.
On the fixed-income side, duration remains close to benchmark, but we are monitoring longer-term bond yields for potential opportunities. Credit risk remains constrained given tight credit spreads.
At month-end, model positioning was characterized by:
- Slightly overweight positioning in stocks versus bonds
- A tilt toward growth stocks over value stocks
- An overweight position in U.S. stocks
- A slightly underweight position in EM stocks
- A slightly underweight position in DM (developed markets) international stocks
- Neutral to slightly underweight duration exposure
