We remain overweight Global Stocks, we are reducing Exposure To The U.S. While valuations are not as compelling as they once were, in a world of negative real rates, equities still offer significantly more upside than most other assets. We upgraded euro area and Japanese equities at the expense of US stocks. The reasons for underweighting U.S. stocks are straightforward. While the Fed is preparing to raise rates, most other central banks continue to ease monetary policy. US equities tend to perform poorly in the immediate aftermath of the first rate hike. Earnings growth is also slowing. S&P 500 EPS estimates for 2015 have fallen from $136 last October to $119 today, the swiftest decline since the financial crisis. And this is not just about the energy sector.
While 2015 EPS estimates for energy companies have been pared by 43% in the past three months, they have also declined in every other sector. The stronger dollar has played a role in crimping margins, which is not surprising considering that foreign revenues account for over a third of S&P 500 sales. A 10% appreciation in the broad trade-weighted dollar tends to reduce S&P 500 EPS by around 2.5%. Given that the dollar has risen by 15% since last summer, this should lower EPS by $4. Analyst forecasts that profit margins will continue to expand from already record-high levels look increasingly implausible in the current environment. In part, this is because wage growth should pick up as the labour market moves closer to full employment