Equities: reduce weightings into tactical bounce (analysts)

Part of a report of Credit Suisse – Global Equity Strategy 

We take equities down to benchmark and reduce our year-end S&P 500 target to 2,050 from 2,150 (having already reduced our equity weightings to the lowest since 2008 on December 2nd). 
Our tactical indicators gave a buy signal on January 21st (which normally leads to a 3-4% bounce, which we have had), but we have decided to turn more cautious on the back of the following concerns:

â–  ERP is at fair value: The warranted equity risk premium in the US (based on ISM new orders and credit spreads) is at 6.2%, slightly above the actual ERP, and to get to fair value ISM needs to recover to 56.
â–  A more complicated macro environment: Global nominal GDP growth is very weak (sub-4%); several US lead indicators are consistent with sub-1.5% GDP growth (we think that there is a 40% chance that lead indicators are right); there are some signs that the US labour market is tightening, hence, if the consensus view of 2.5% US GDP growth is correct, wage growth could rise above 3%, causing a fall in earnings; China's property data, the loan-to-deposit ratio and control of FX reserves have all been worse than we had expected, increasing the risk of a hard landing; and the Fed appears to be unusually focused on lagging indicators of activity. Clearly, the Fed matters because the dollar is the world's reserve currency at a time when US monetary and financial conditions have both tightened sharply. 
â–  Earnings: We downgrade US EPS growth to be flat for 2016; NIPA and reported earnings suggest operating EPS has been flattered (and ex-energy, operating EPS is flat year-on-year).
â–  Our previous worries remain: 
i) abnormally high levels of disruption, caused by China exporting its excess investment and disruptive technology;
ii) less corporate-friendly policies; 
iii) buybacks as a style underperforming (and buybacks have accounted for a third of EPS growth since 2012); and
iv) announced M&A deals at danger signals. 

Why not underweight? 

Outside of the US, markets look cheap (the European ERP is 8.6%, against fair value of 6.8%, on our models); to get a bear market EPS needs to fall meaningfully – for that we need wage growth above 3% or US GDP growth to be sub-1.2%; the corporate sector and private equity can buy 8% of market cap; in the event of a disinflationary shock, central banks will (eventually) respond, in our view, and global excess liquidity remains supportive; global PMI new orders are not consistent with a sharp GDP slowdown. Tactical indicators are still supportive.
Is this like 2008? In our view, no: ten factors are better, five are worse. 
What is needed for markets to stabilise? A stabilised oil price, clear evidence that it's different in the US this time around (i.e., the savings ratio falls and employment stays robust), China to stabilise capital flight, high yield spreads to narrow or, failing all of this, a Fed response

Research Analysts,  Credit Suisse – Global Equity Strategy