Markets Edition: Global Equities—Resilience or Complacence?

PodcastResearch @ CitiDavid GrummanOct 13

Citi economists argue that the global economy has remained resilient after a real energy shock, though some data series have begun to roll over. Equity markets have delivered strong gains despite volatility, while earnings expectations and revisions remain supportive; French spreads are a particular pressure point for domestically exposed sectors. Commodity strategists see a 60% chance of energy flows normalizing by year-end, while the speakers expect further equity upside to come from earnings growth and maintain a barbell of growth and cyclicals.

Equities Corporate Earnings Energy Markets

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Key Takeaways

Citi economists say the global economy absorbed a real energy shock and remains resilient, while commodity strategists put a 60% probability on energy flows normalizing by year-end, which they say could bring Brent to around $70 a barrel in 2027; they see roughly a 30% chance disruption lasts into next year.

The guest says the MSCI AC World is on pace for a fourth consecutive year of double-digit gains, with fundamentals holding up; consensus projects 35% EPS growth this year and 16% next year, while earnings revisions have posted net upgrades for 23 straight weeks. He also cites roughly 30 past episodes in which equities were higher three months after sharp 10-year yield rises, with better performance when growth indicators improved and inflation cooled.

The speakers say their global equity allocation sees further upside from earnings growth rather than multiple expansion, and they maintain a barbell of growth and cyclicals while remaining overweight the U.S. and Japan. That positioning aligns with consensus expectations for 16% MSCI All Countries World Index EPS growth next year, following 35% growth this year.

ECONOMY

Economic Resilience — Citi economists argue that the global resilience narrative remains intact. The world economy absorbed a real energy shock since late February and kept performing, supported by a production base more flexible and adaptable than a decade or two ago. Economic surprise and data change indices remain constructive, although some series have started to roll over in recent weeks.

“City economists see the global resilience narrative as firmly intact. The world economy absorbed a real energy shock since late February and kept performing…”—

MARKETS

Equity Momentum — The guest says the MSCI AC World is on pace for its fourth straight year of double-digit gains, though the headline masks volatility and the path has not been smooth. Fundamentals have held up, and he expects another strong year for earnings growth in 2027.

“So we're still in the resilience camp, though we take the debate really seriously…”—

Rate-Hike History — The guest says equities tend to wobble in the first three months after the Fed starts raising rates, but performance has generally been fine after six or 12 months. In roughly 30 past instances of sharp rises in 10-year yields, equities were higher three months later. Performance was better when growth indicators improved and inflation cooled.

“On the Fed, we've looked at equity performance around the first hike going all the way back to the nineteen seventies…”—

FORECASTS

Brent Outlook — The guest says commodity strategists assign a 60% probability to energy flows normalizing by year-end, which should take Brent to around $70 a barrel in 2027. They see around a 30% chance that disruption drags into next year. If tensions escalate near term, he says history favors commodity sectors and defensives, as well as the US and UK over markets like Japan and the yen.

“So there's obviously a lot of uncertainty here, but what I will say is that our commodity strategist base case, which they put around a 60% probability on, still sees…”—

Global Equity Resilience

The strategists argue that global equities remain resilient despite volatility, with fundamentals holding up and rate increases unlikely to derail the bull market on their own.

Rates And Geopolitical Risks

Historical equity performance suggests rising rates are not automatically bearish, while prolonged geopolitical disruption could revive stagflation risks; Citi's base case expects energy flows to normalize by year-end.

Energy And French Spreads

The speakers discuss energy disruption scenarios and France's elevated bond spreads, noting that French banks and domestically exposed sectors may face particular equity pressure.

Earnings Support Equity Upside

Citi sees macro conditions and earnings as supportive despite some data rolling over, and expects further equity gains from earnings growth while maintaining a barbell of growth and cyclicals.