Market Insights Team
KEY TAKEAWAYS
|
Economy & Markets
| Global Growth Broadens Beyond Services |
MFS PERSPECTIVE
|
| Year-End Rate Expectations Have Risen Above Pre-War Levels |
MFS PERSPECTIVE
|
| Stronger Earnings Outlook Supports Equities |
MFS PERSPECTIVE
|
| Value Revives As Momentum Loses Steam |
MFS PERSPECTIVE
|
| US |
• UNDERWEIGHT • NEUTRAL • OVERWEIGHT
|
| MFS CONSIDERATIONS |
| LARGE CAP |
- Earnings beat rates are at multi-year highs, with financials, energy, and materials providing meaningful contributions to headline earnings growth.
- Despite broadening earnings growth, the scale of growth continues to be concentrated in AI-adjacent technology.
| SMALL/MID CAP |
- Earnings revisions and growth expectations continue to accelerate higher.
- Within SMIDs, mid-caps trade at a meaningful valuation discount relative to large and small cap peers.
| GROWTH |
- Despite strong earnings results, concerns remain regarding the levels of capex spending from hyperscalers and whether future cash flows from these investments will be sufficient.
- Improving earnings breadth should provide opportunities outside of the megacaps.
| VALUE |
- Strong earnings from cyclical value sectors are supporting broader market participation.
- Valuation discounts remain attractive, but investors should focus on companies with high-quality earnings and balance sheets to take advantage of relative opportunities.
| EUROPE EX UK |
- Earnings are improving as manufacturing stabilizes and AI demand broadens.
- Fiscal, defense, and infrastructure spending is lifting investment across more sectors.
- Valuations remain supportive, though renewed Iran risk warrants caution.
| MFS CONSIDERATIONS |
- We favor firms tied to capex, automation, electrification, and power infrastructure.
- High valuation dispersion supports active stock selection across regions and sectors.
- Resilient earnings, pricing power, and balance sheet strength may offset macro sensitivity.
| UK |
- A new prime minister is in place, but global growth and rates still drive UK equities more than politics.
- Inflation weighs on sentiment, but earnings remain resilient.
- Valuations remain attractive amid subdued investor interest.
| MFS CONSIDERATIONS |
- Wide valuation discounts may offer upside where fundamentals prove resilient.
- Global revenue exposure may help offset softer domestic activity.
- M&A interest continues to highlight the gap between public prices and private views of value.
| JAPAN |
- Nominal growth, wages, and inflation signal a shift from the deflationary past.
- Manufacturing, automation, and tech are aided by global capex and AI spend.
- Earnings are increasingly driven by fundamentals, not currency alone.
| MFS CONSIDERATIONS |
- Corporate profitability and shareholder focus remain supportive of earnings growth.
- Opportunities extend beyond exporters as wages and domestic demand improve.
- Performance is increasingly tied to company fundamentals, not broad macro trends.
| EM EQUITY |
- Earnings remain strong, supported by semis and AI.
- Manufacturing activity and global capex continue to support export-oriented markets.
- Investors are watching whether strong tech earnings broaden across sectors and regions.
| MFS CONSIDERATIONS |
- Technology supply chains remain key beneficiaries of AI-related spending.
- Greater differentiation across countries and sectors may create a wider opportunity set, while energy-dependent countries face the return of higher energy prices.
| EM DEBT - HARD CURRENCY |
- Emerging markets’ increasingly developed fiscal and monetary frameworks leave fundamentals structurally stronger than in prior cycles.
- Yield remains attractive, but spreads are hovering just above all-time tights, leaving valuations rich.
| MFS CONSIDERATIONS |
- EM has been remarkably resilient amid ongoing geopolitical risk.
- However, the longer duration of the asset class may be a headwind if inflation picks up.
- We prefer shorter-duration asset classes like high yield for return-seeking fixed income.
| EM DEBT - LOCAL CURRENCY |
- Iran-driven currency weakness has been a setback to otherwise strong recent returns.
- Longer-term headwinds to the dollar have not disappeared; the recent bounce in the greenback may provide a good entry point.
| MFS CONSIDERATIONS |
- A more tactical asset class by nature, swings in risk sentiment and global rate expectations can provide windows of strain and opportunity.
- While the risk of sticky US inflation pushing the dollar higher remains, our outlook stays positive.
| USD DURATION |
- Despite softer June figures, inflation remains sticky and above target, while renewed US–Iran tensions pose upside risks.
- Markets have shifted from pricing Fed cuts to being biased toward future hikes.
| MFS CONSIDERATIONS |
- A more hawkish Fed and renewed geopolitical tensions risk putting upward pressure on long-term yields.
- Treasuries still offer risk-off protection should growth weaken and investment sentiment deteriorate.
| US IG CORP |
- Corporate fundamentals remain solid, with healthy balance sheets, record earnings, and attractive yields supporting demand.
- Spreads remain tight; geopolitical tensions and elevated AI-related issuance are key risks.
| MFS CONSIDERATIONS |
- Broadening AI-driven growth is supportive of risk and less defensive positioning.
- However, with spread valuations less compelling, active security selection is increasingly important.
| EURO IG CORP |
- Fundamentals remain resilient, with upgrades outpacing downgrades and earnings holding up despite weak growth.
- Tight spreads and higher energy prices keep the backdrop challenging, limiting the appeal of EUR IG versus higher yielding alternatives.
| MFS CONSIDERATIONS |
- A higher-inflation, slower-growth backdrop favors active security selection and strong risk management.
- The market has absorbed heavy issuance well, but sustained supply could become a headwind if investor demand softens.
| EURO DURATION* |
- Despite ongoing geopolitically driven inflation uncertainty, June’s hike has improved the outlook for duration as the extent of any further ECB tightening remains unclear.
- Soft European growth may cap how much further the ECB can tighten and could open the door for cuts down the road.
| MFS CONSIDERATIONS |
- With ongoing inflation uncertainty, the ECB will likely stress policy path flexibility and a meeting-by-meeting approach to future interest-rate decisions.
| US HIGH YIELD |
- All-in yields above 7% remain attractive, while spreads have largely recovered from their geopolitically driven widening.
- Credit fundamentals remain strong, with higher-quality borrowers supporting resilience.
| MFS CONSIDERATIONS |
- Higher-quality, shorter-maturity HY issuers appear more attractive, while pockets of stress in lower-rated issuance reinforce the need for selectivity.
- Improving technicals since May have provided additional support for the asset class.
| EURO HIGH YIELD |
- Carry and short duration continue to support European HY, while manageable net supply underpins technicals.
- Fundamentals have softened, particularly among lower-rated issuers, but not enough to materially alter the default outlook.
| MFS CONSIDERATIONS |
- We are most cautious on European high yield, where valuations offer limited compensation for the risk.
- Lower-quality issuers remain most exposed to further escalation; active security selection is key as dispersion rises.
The views expressed herein are those of the MFS Strategy and Insights Group within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at any time and should not be construed as MFS’ investment advice, as portfolio positioning, as securities recommendations, or as an indication of trading intent on behalf of MFS.
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