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It’s time for our mid-year update to our 2017 Global Market Outlook. And the short story is that we’re not changing many of our views from our annual outlook. We still believe in buying dips and selling rallies against a backdrop of an expensive U.S. equity market. We see an earnings outlook that looks broadly neutral. And we see overall sentiment indicators that point to complacency. We believe Europe is in a better position within its market cycle and, to a lesser extent, feel the same about Japan and emerging markets. We think government bonds are expensive, but a lack of global inflation pressure should keep yields in range.

U.S. economic overview

If we take a closer look at the U.S., last quarter our strategists cautioned that investors were becoming over-optimistic about near-term U.S. growth prospects. Disappointment seemed likely, creating the potential for market volatility. Sure enough, the U.S. economic data subsequently began to disappoint. One interesting data point is the Citigroup economic surprise index, which tracks U.S. economic data releases against consensus forecasts from economists. This index plunged from plus-60 in mid-March to minus-80 in late June.

We believe that shift from positive to negative economic surprise triggered a 45-basis point decline in the 10-year Treasury yield and a 5% fall in the U.S. dollar index. But, that said, the negative economic shift hasn’t yet generated a meaningful pullback in U.S. equities.

U.S. equities: Cycle, value and sentiment

But we are keeping a close eye on the U.S. equity market sector, as our cycle, value, and sentiment process tells us to be cautious. Expensive valuation implies a kind of dangerous asymmetry in the return outlook, where the potential downside is larger than the upside.

For now, the absence of significant U.S. recession risk means the cycle is broadly neutral for equities. This stops us from being too bearish. Overbought sentiment stops us from chasing the current momentum-driven rally. So, as we said, we want to lighten up in the current rally and look to buy the next dip.