Fannie Mae, Freddie Mac shares tumble after conservatorship comments
Investing.com-- Global equities have surged in recent months, but Oxford Economics is hitting the brakes, warning that the market has rallied "too far, too fast" and that investors are underestimating the economic risks building from new tariffs and slower-than-expected Fed rate cuts.
"There is growing complacency over the economic impact of tariffs, but we think the negative effects will become clearer in the coming weeks," Oxford Economics said in their latest note.
The bullish case for stocks hinges on imminent Fed easing, but Oxford’s economists expect the first cut only in December. That is months later than the October timeline currently priced in by markets. The economists trimmed their global equity allocation to neutral, arguing that valuations are stretched and momentum in key regions like the Eurozone is clearly fading.
Earnings Season: Low Bar, Slowing Growth
US companies are topping Q2 estimates, but that’s mostly due to what Oxford Economics calls a "low bar set by analysts." While a larger share of companies is beating expectations, blended S&P 500 EPS growth for the quarter clocks in at just 7%—the slowest since late 2023. Margin pressure is evident, as S&P 500 EBIT margins are set to fall by 2% quarter-on-quarter, and Oxford expects these headwinds to persist as the tariff burden builds and companies struggle to pass on higher costs amid moderating demand.
"We are also seeing the first signs of tariff-related margin compression as S&P 500 EBIT margins are on track to fall by 2% q/q. In contrast to the bottom-up consensus, we expect these margin pressures to persist over the coming quarters as the effective tariff rate continues to rise and companies struggle to fully pass on higher costs against a backdrop of moderating end demand...We think this will be a headwind for the market in the near term," the economists said.
Oxford Economics doesn’t expect a collapse in US profit margins, however, thanks in part to strong productivity gains and incentives from the One Big Beautiful Bill Act, both of which could extend US companies’ advantage over global peers. "We continue to favour US equities versus other developed markets due to this structural edge," the analysts wrote.
Eurozone and Cyclical Sectors Face Headwinds
The European earnings season, by contrast, is off to a rough start: The number of companies beating expectations is below average, and ongoing strength in the euro is pressuring exporters. “Globally-oriented sectors such as tech hardware, consumer durables, and household products have seen sharp downward EPS revisions in recent months and we think these sectors will face further pressure as the global manufacturing cycle weakens,” Oxford Economics added, maintaining its underweight rating on Germany, France, and Italy.
The recent rally in cyclical sectors, meanwhile, looks fragile, with valuations already "at the top end of their long-term range" and inconsistent with Oxford’s forecast for a slowdown over the next few quarters. The economists remain overweight communication services and healthcare, neutral on IT, and underweight industrials and materials.
Country Allocation: South Korea In, Australia Out
On the country level, Oxford has raised South Korea to overweight, citing robust EPS momentum, improving sentiment tied to new corporate reforms, and sectoral diversification that should cushion against global trade headwinds. Australia, meanwhile, is cut to neutral as its relative EPS upgrade cycle fizzles and iron ore faces a bearish outlook.
Overall, the economics stressed that now is a time for patience and selectivity, not chasing the rally. “We continue to favour US equities versus other developed markets due to this structural edge,” the analysts said, while warning that complacency around tariffs and profit margins could spark disappointment in the near term.