GOAL KICKSTART
Better asymmetry into Q3 earnings after valuation reset
Last week, global PMIs were strong, led by US services reaching a post-pandemic high. The September FOMC minutes suggested that an October hike is unlikely, while Euro-area sovereign stress remained elevated. This week, focus shifts to US (forecasts for Core CPI (MoM), September: GS +0.24%, consensus +0.2%, last +0.3%) and global inflation data as well as the start of the Q3 earnings season (Exhibit 1).
The Q3 earnings season begins with US financials this week, ahead of the main Tech companies reporting later in the month. Earnings revisions have stayed positive but there has been more differentiation: over the past three months, 2026 EPS estimates have risen by 7% for MSCI AC World, led by the US and Asia, while European strength has been concentrated in fewer sectors (Exhibit 2). AI-infrastructure beneficiaries are expected to generate more than half of Q3 S&P 500 EPS growth and similarly Tech hardware remains the important driver in Asia. In Europe, consensus expects 23% year-on-year EPS growth in the second half, or 16% excluding Commodities. Technology leads global revisions, although price performance has been more mixed as investors assess whether future revenues and productivity gains can justify the scale of AI investment.
Recent equity weakness has coincided with broad P/E de-rating across markets over the past month amid elevated rates volatility (Exhibit 3). As we recently wrote, the largest valuation de-ratings have been driven by strong earnings in Technology, particularly AI capex beneficiaries, although some segments linked to AI applications and adoption have also re-rated. Energy prices, Euro weakness and political uncertainty have added to the pressure on European equities. European Banks show this divergence most clearly, with supportive earnings and dividends offset by material P/E compression (Exhibit 4).
Option markets continue to price considerable differentiation through the earnings season. Implied correlation sits in the bottom decile across most equity markets, with the US particularly low relative to its history and other markets. (Exhibit 5). Within the S&P 500, implied correlation is also low both within and across sectors, helping to contain index volatility despite the elevated macro risks (Exhibit 6).
Against this backdrop, in our latest GOAL asset allocation update we shift to OW Equities over 3m and UW Credit over 3m, while moving to OW Bonds over 12m and OW Cash tactically. Earnings growth remains supportive for equities and the recent valuation de-rating has improved asymmetry into the Q3 earnings season. We increasingly see long-duration bonds offering better medium-term value as inflation normalises and central bank pricing becomes less hawkish; tactically we still prefer shorter-duration fixed income (OW cash). Within equities, we remain OW the US and Asia and UW Europe and continue to favour a barbell of global Technology stocks with selective rate-sensitive, high-dividend, low-volatility and bond-proxy equities that could benefit from eventual rate relief.