The positioning data is the standout for traders. With hedge fund net exposure near the bottom of its multi-year range, a benign CPI print (preview) or a breakthrough in the Iran conflict could force investors back into stocks quickly, amplifying any rally. In Europe, the strong inverse link between equities and Bund yields means an energy-driven inflation scare would hit stocks and bonds together, so gas storage heading into winter matters as much as the oil price for European equities. The French-German bond spread is set to remain a barometer of euro-area political risk into next year’s presidential election, with the potential to weigh on the euro and French banks. Oil and gas remain the key swing factors for whether Europe’s discount narrows.---Goldman’s Wilson sees investors who have cut risk to the bone facing a market where earnings are still growing fast and valuations have already come down.Summary:Mark Wilson, head of European equities franchise sales and hedge fund coverage at Goldman Sachs, favours long US megacap tech and a basket of German fiscal spending beneficiariesHe said Europe is more vulnerable than the US to the energy shock, with European stocks and 10-year Bund yields more negatively correlated than at any time since the 1990sHedge fund net equity exposure has been cut to multi-year lows in response to higher rates and other uncertaintiesWilson sees US third-quarter earnings growth of around 27%, likely the peak, with Europe growing around 22% in the second half, or 15% excluding energyClients are focused on the French-German bond yield spread and European gas inventories heading into winterHe is watching US CPI, a possible break in the Iran conflict before the US midterms, and third-quarter earningsGoldman Sachs’ Mark Wilson favours US megacap technology stocks and German companies set to benefit from fiscal spending, arguing that strong earnings growth and lower valuations leave a constructive setup despite higher bond yields and energy prices.Wilson, head of European equities franchise sales and hedge fund coverage at Goldman Sachs, said in an interview published by the bank that Europe is more vulnerable than the US to the energy shock, given greater inflationary pressure. On a six-month basis, European stocks and 10-year German Bund yields are around minus 70% correlated, a degree of inverse correlation not seen since the 1990s, which he described as a regime shift. Natural gas is as much of a concern as oil for Europe, he said, and clients are closely watching gas inventories as winter approaches.Clients are also focused on France, where the spread between French and German government bond yields has widened sharply over political tensions around the budget. Wilson expects the issue to remain a feature of markets in the months ahead of the French presidential election in the first half of next year.Higher rates have driven a logical de-rating of equities on both sides of the Atlantic, Wilson said, with rate-sensitive sectors such as European renewables down by more than 20%. Investors have cut risk sharply. Net exposure among US fundamental long-short hedge funds sits near the bottom of its one-year range and in the lowest few percent of its three- and five-year ranges, while global funds are in the bottom tenth of their ranges.Wilson rejected the view that Europe is a value trap. He acknowledged that higher energy costs are a real competitive headwind showing up in company numbers, but said Europe already trades at a discount, partly reflecting that, and has kept pace with the US this year. He pointed to investment themes in rearmament, energy independence and industrials, and said AI deployment could ease the drag from Europe’s demographics. European banks, he noted, have outperformed the largest US tech stocks over one, three and four years.On earnings, Wilson expects US third-quarter growth of around 27% (UBS is at 28%), probably the peak for this cycle, while Goldman forecasts European earnings growth of about 22% in the second half, or 15% excluding energy companies. Although growth is slowing at the margin, he said high nominal growth combined with compressed valuations keeps the setup favourable.His first trade is long US megacap tech. He argued that hyperscaler revenue growth lags heavy capital spending by several quarters and that returns on that spending are beginning to come through. His second is long German fiscal spending beneficiaries. German manufacturing surveys are outpacing the US, earnings estimates for the group have risen by around 13% to 14% this year, yet the stocks have de-rated by more than 20% and trade on low-teens multiples.Looking ahead, Wilson flagged US CPI as key to whether yields can stop rising. He also sees a window for a break in the Iran conflict ahead of the US midterm elections, with third-quarter earnings set to shape views on the AI trade. This article was written by Eamonn Sheridan at investinglive.com.