Equities and bond yields will need to head lower on a recessionary repricing – SocGen

The regional banking crisis is not fully played out yet. Economists at Société Générale discuss equity outlook.

US financials should continue to underperform their European counterparts

“The bank failures have tightened credit conditions – and are very likely going to help the Fed reach the end of their tightening cycle sooner. The last hike is going to trigger more allocation to US treasuries, and that would provide the US tech sector (and other long duration sectors) with a tailwind. If rates do move higher, we’re likely to be back in a grinding-lower environment (as in 2022).”

“While we think greedflation is likely to keep equities afloat in the near term, if we were to have a recessionary repricing, both equities and bond yields will need to head lower together in our view – hybrids trade line up well to hedge this tail-risk.” 

“Given the Fed is closer to the end of the hiking cycle than the ECB, European rates should continue to tighten vs in the US. When combined with worse investor sentiment in the US, we think US financials will likely continue to underperform European banks.”