Highlights:

• The current environment still looks beneficial for equities in 2022. Fundamentals remain robust as global and EA GDP growth will stay above potential (above 4%) and real yields contained. Solid pricing power and growth should keep margins relatively safe.
• Thus, equities will be supported by continued solid earnings growth which we cautiously estimate at +10% (EA and US). This considers higher wage growth and lower momentum in capacity utilization.
• All in, we forecast a positive total return of around 7% over the next 12 months, assuming some further PE compression and a drag from a diminishing policy support.
• That said, sticky high inflation triggers a higher uncertainty regarding the monetary response to future macro data. Furthermore, the risk premium usually gets more volatile in periods of higher inflation and eroding confidence indicators (e.g., PMIs). Finally, bond volatility has increased, which historically has fanned the risk of lower equity risk-adjusted returns vs bonds and spikes in equity volatility.
• Thus, we maintain a cautious OW in equities, recommending a slight OW in EMU vs. US and a style and sector barbell strategy: OW Value and defensive growth. We see a neutral stance on EMs warranted in the short term.

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