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It's time now for today's strategy session. Options markets are pricing in the US 10-year treasury yield hitting 5%. Currently, the bond market is actually offering a greater return to investors compared to the dividend yield from the S&P 500. So is now possibly the time to shift your portfolio from stocks and buy into bonds? Let's talk about that and more. We want to bring in Luca Paolini. He's Pictet Asset Management's chief strategist. Luca, that's one of the questions, maybe on investors' minds here this morning, whether or not the bond sell-off is nearing an end, and it could be an opportunity here to buy in for investors. What do you think?

Ah, Shannon, well, let me say that when you look at valuation alone, there is a clear and strong case for bonds now. Uh, you have even real uh bond yields at levels that we haven't seen in a long time. Um unless you expect something really terrible to happen on the inflation side, or a significant acceleration in growth, the current level of bond yields is very attractive. On the other side, you look at the equity side and I still believe the fundamentals are quite supportive. Earnings are okay, growth is okay. At the same time, you have a significant um share of investor portfolios, um in equities right now. And so, I think some kind of diversification or reallocation into bonds makes sense. I don't know if now is the right time, exactly now, but I do believe in the next few months there would be a great buying opportunity for bonds. And we are already increasing our duration exposure in our portfolios.

And so, where are you kind of sitting on the duration portion of, of your allocation right now?

But when you look at bonds, we see more value in, in European bonds, to, to be honest, especially in the high yield space. Um there are good yields, the ECB is going to cut rates more aggressively than, than, than the Fed. Inflation is more under control. So, we think that there is more value in Europe than in the US when you look at the, at the bond market. But also in the US, I have to say again, uh we look at tips, you know, uh 10-year tips, or 30 years as well. I mean, it's uh, uh, close to 2.6. So, I think there are levels where it starts to become actually quite, quite attractive, but for us the preference is on European bonds. And we've also started to like emerging market bonds because we feel that the dollar is getting very close to a, maybe not only a cyclical peak, but even a secular peak potentially. So, we want to be exposed to emerging market debt as well.

Luca, let's talk about one of your theses here, because you, you lay out a maybe comfortable, but also potentially dangerous scenario or situation for equities in the months ahead. Explain your thesis, and maybe what investors should be doing, or should not be doing at this point, to be a little bit more proactive.

I think you know, if you are sitting on a lot of profits because you've been overweight equities in the past few years, I think it makes sense to reduce exposure there. We still believe that US equities should outperform in the next, in the next few months, but I think the case for equities is more difficult. Everybody seems to be overweight, positions are very, very, very uh, extended. When you look at earnings season, we have an earning season ahead of us. Um, consensus seems to be quite on the bullish side. I don't see how margins, for example, can expand from, from current levels. So, I think some kind of, you know, uh maybe reduction of equity exposure may, makes sense. No reason to panic, though, because again, as long as the US economy is growing at 2% and inflation doesn't accelerate significantly, the macro backdrop remains quite positive for equity markets.

So if you think that we're going to see an adjustment of some of the margin expectations, how does that play into what is largely been expected by many strategists for calendar year earnings growth of 15%?

I think it's far too high because you know, when you look at the last year, last year the big surprise was US growth growing at almost 3% when expectation was one. So you have a delta of two percentage points, which is massive, in terms of earning growth and also margins. This year we start from already high level of growth. I don't see how US growth can accelerate from the current level. And you see that real wage growth is positive. So effectively, wages are rising more than inflation, which was not the case uh for example, one or two years ago. So it's difficult for me to believe that you are going to see a significant improvement in margin. So, this, there is the kind of potential risk for disappointment for, especially for the US, but not only. So I think there is a risk uh in the earning season to, you know, for, for investors to be slightly disappointed.

Luca, thanks so much for taking the time here with us, just after the opening bell. Appreciate it.

Thanks.