US Markets Outlook : Strategies Amid Momentum Decline and Macro Shifts

The discretionary community remains heavily exposed to currency risks, with a significant tilt towards long positions on the US dollar, especially against the euro and Chinese yuan. Equities hold the next largest slice of risk, with US exceptionalism standing out as a dominant theme. Meanwhile, exposure in the rates market has notably decreased, reflecting a shift towards higher rates in the belly of the curve, albeit with lower conviction. Gold, which had previously retained its appeal even through the US election period, experienced some turbulence driven by dollar strength and rising real rates but remains a committed hold for many investors. Bitcoin, frequently discussed among hedge funds, continues to gain credibility, with participants favoring trading long positions that capitalize on its volatility and expanding institutional adoption.

Investor sentiment towards Europe and the UK is strikingly pessimistic, both in absolute terms and relative to the US. The challenges are evident in indicators such as the widening spread between French OATs and German Bunds, the slump in German economic momentum as seen in IFO's current conditions index, and the UK's uninspiring budget outlook, which lacks a clear growth strategy. Compounding these concerns is the specter of escalating trade tensions, with potential tariff impacts threatening to significantly erode European corporate earnings growth. A projected 10% across-the-board tariff combined with steeper levies on China could carve out seven percentage points from the SXXP's earnings growth forecast, which is already modest at just 3% for the coming year.

In contrast to Europe, there is widespread acceptance of US asset superiority. Far from begrudging, market participants are embracing strategies that pair long positions in US equities with short positions in European counterparts, leveraging the staggering outperformance of the S&P versus the SXXP, which has been a fivefold differential year-to-date. However, this overwhelming bearish sentiment towards Europe has led some to speculate about the potential for a short-term counter-trend rally in European equities, fueled by mean reversion and technical factors.

The narrative of US dominance extends to the currency markets, where the dollar's allure is underpinned by superior growth prospects, robust asset performance, and favorable capital flows. These advantages are bolstered by the dollar's positive carry and its role as a hedge against tariff-related risks. The speculative community has largely internalized this view, suggesting a medium-term upward trajectory for the dollar. For the new US administration, a strengthening dollar could also serve as a tool to curb inflationary pressures, aligning with political and economic objectives.

Debate around the Fed's next move is rife, with questions on whether rates should be cut again in December. The upcoming payrolls report, expected to reflect a rebound from prior distortions, may hold the key to this decision. On balance, the likelihood of a 25 basis point cut remains strong, providing the Fed with a buffer of 100 basis points while allowing time for economic variables to stabilize and evolve. This cautious approach aligns with broader concerns about maintaining economic momentum.

The post-election period is anticipated to create fertile ground for significant capital formation activities, including IPOs, follow-on offerings, block trades, and corporate debt issuances. While December may not see the full realization of this trend, the pipeline for new issues looks promising, contributing positively to market dynamics and offering opportunities for alpha generation. Additionally, the outlook for mergers and acquisitions appears brighter, with structural and personnel changes likely to reignite activity after years of underperformance.

De-regulation emerges as a central theme, with the potential to drive high nominal GDP growth. While tariff risks dominate client conversations, the prospect of substantial de-regulation, particularly in the financial sector, receives comparatively little attention. Simplifying regulatory frameworks is a relatively straightforward policy lever with significant economic implications, providing an avenue for the new administration to stimulate growth without exacerbating fiscal challenges.

Historical patterns suggest that the incoming administration prioritizes robust growth policies and a strong stock market. This preference implies a reluctance to adopt measures that could undermine these goals. As such, market participants can reasonably expect policy initiatives to favor economic expansion and investor confidence.

Skepticism surrounds the idea that DOGE (presumably referring to broader budgetary reforms or spending initiatives) will lead to meaningful expenditure reductions. Nonetheless, drawing from the entrepreneurial track record of key policymakers, there remains room for optimism about unconventional approaches to fiscal management. Lessons from disruptive ventures in other industries hint at the potential for transformative strategies in public finance.

Despite the scale of US debt and deficits, these issues have not garnered as much concern as expected, perhaps due to the stability in long-term interest rates post-election. The yield on the 30-year Treasury bond has remained steady, mitigating immediate fears and providing a buffer against fiscal risks.

The expectation of heightened volatility following the election could set the stage for dynamic trading opportunities. While 2017 saw historically low volatility, the policy shifts and initiatives anticipated in the early days of the new administration suggest a break from this pattern, creating a fertile environment for active traders.

The fundamental backdrop for US equities remains favorable, supported by strong growth, accommodative financial conditions, and robust capital flows. Retail investors, corporate buybacks, and systematic strategies like CTAs have contributed to sustained market strength. As the most seasonally advantageous period of the year unfolds, the risk/reward profile for US equities continues to appear attractive, with cyclical sectors, particularly financials, poised to outperform.

This comprehensive outlook emphasizes a balanced approach to navigating markets, highlighting opportunities while acknowledging risks and uncertainties. With steady hands and thoughtful strategies, investors can position themselves to capitalize on the evolving landscape.