The mild pull-back in global equities during Q1 2026 was driven by the US-Iran conflict, while AI-related disruption simmered in the background. Market leadership stayed narrow with resource-related sectors and “defensive value” outperforming driven by concerns about higher inflation and lower economic growth. We think the probability of global recession remains low, though no longer a tail risk. A reacceleration in growth could be delayed by higher inflation than previously assumed and commodity supply disruptions. We think there may continue to be volatility in the short term, but we see upside in the next 12 months as the global economy moves towards trend growth. However, with markets displaying a more late-cycle tilt, we shift our model allocation in that direction by switching our preference from chemicals to basic resources and upgrading construction & materials and utilities. We also further reduce our exposure to consumer discretionary by downgrading retailers and travel & leisure to Underweight.
Changes in our Model Sector Allocations:
- Upgrades: basic resources (UW to OW), construction & materials, utilities (N to OW), consumer products & services, technology (UW to N)
- Downgrades: chemicals, travel & leisure (OW to UW), retailers (N to UW), banks (OW to N)
