Key Takeaways
- • Goldman Sachs head of European Equities, Franchise Sales and Hedge Fund Coverage Mark Wilson says US fundamental long-short hedge fund net equity exposure is in the north percentile on a one-year look-back and in the two-to-three percentile on three- and five-year look-backs, while global fundamental long-shorts sit at 0% to 9% net length.
- • Euro stocks and 10-year Bund yields are about negative 70% correlated on a six-month basis, the strongest negative correlation since the 1990s, which Wilson characterizes as a regime shift.
- • Wilson forecasts 27% year-on-year US third-quarter earnings growth and 22% for Europe in the second half, falling to about 15% for Europe excluding energy stocks.
- • Wilson's two trade ideas are long US mega-cap tech, tied to AI return on spend, and long German fiscal-spend beneficiaries, which have seen 13-14% EPS estimate revisions and derated more than 20%.
- • Key near-term watch items are next week's CPI release, a possible break in the Iran conflict, the OAT-Bund spread, European gas inventories and the French budget and presidential election outlook.
Summary
In a Goldman Sachs "The Markets" podcast recorded on Wednesday, October 7, host Chris Hussey interviewed Mark Wilson, head of European Equities, Franchise Sales and Hedge Fund Coverage within Goldman Sachs' FICC and Equities Group, about rising rates and oil prices. Wilson said Europe is more exposed to the energy shock than the US, with higher inflationary pressure. He pointed to a sharp widening of the OAT-Bund spread, driven by political concerns around the French budget, and said that issue is likely to persist through the run-up to France's presidential election in the first half of next year. Clients are focused on that spread and on European gas inventories heading into winter.
Wilson said equity markets have de-rated in response to higher rates, with S&P and European multiples both compressing and European renewables falling more than 20%. The most notable development, in his view, is how sharply hedge funds have reduced equity exposure. He cited fundamental long-short positioning in the US at the north percentile on a one-year look-back and at the two-to-three percentile on three- and five-year look-backs, with global fundamental long-shorts at between 0% and 9% net length.
On Europe versus the US, Wilson said part of the regional discount reflects index composition, with less technology and fewer high-growth companies. He argued Europe has kept pace with the US this year, supported by investment cycles in industrials, renewables and defense, and by policy responses to COVID, the Russia-Ukraine conflict, the Iran conflict and AI deployment. He said European banks have outperformed the Magnificent Seven over one-, three- and four-year periods. Wilson forecast US third-quarter earnings growth of 27%, on a clean basis excluding one-time gains, and 22% for Europe in the second half, or about 15% excluding energy. He said the second derivative of earnings growth is slowing, particularly in the US.
Wilson offered two trade ideas: long US mega-cap tech, based on early signs of AI return on investment, with hyperscaler capex and cloud backlogs both above 100%, and long a basket of German fiscal-spend beneficiaries, which has seen 13-14% EPS estimate revisions this year while trading at a low-teens multiple. He named CPI next Wednesday as the most important near-term event, along with a possible break in the Iran conflict ahead of the US midterms and third-quarter earnings, which he said will test the state of the AI trade.
Wilson said equity markets have de-rated in response to higher rates, with S&P and European multiples both compressing and European renewables falling more than 20%. The most notable development, in his view, is how sharply hedge funds have reduced equity exposure. He cited fundamental long-short positioning in the US at the north percentile on a one-year look-back and at the two-to-three percentile on three- and five-year look-backs, with global fundamental long-shorts at between 0% and 9% net length.
On Europe versus the US, Wilson said part of the regional discount reflects index composition, with less technology and fewer high-growth companies. He argued Europe has kept pace with the US this year, supported by investment cycles in industrials, renewables and defense, and by policy responses to COVID, the Russia-Ukraine conflict, the Iran conflict and AI deployment. He said European banks have outperformed the Magnificent Seven over one-, three- and four-year periods. Wilson forecast US third-quarter earnings growth of 27%, on a clean basis excluding one-time gains, and 22% for Europe in the second half, or about 15% excluding energy. He said the second derivative of earnings growth is slowing, particularly in the US.
Wilson offered two trade ideas: long US mega-cap tech, based on early signs of AI return on investment, with hyperscaler capex and cloud backlogs both above 100%, and long a basket of German fiscal-spend beneficiaries, which has seen 13-14% EPS estimate revisions this year while trading at a low-teens multiple. He named CPI next Wednesday as the most important near-term event, along with a possible break in the Iran conflict ahead of the US midterms and third-quarter earnings, which he said will test the state of the AI trade.
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