In this edition of On Market Realities, we examine recent developments in the local equity market within the broader context of global equity dynamics. Drawing on our assessment of prevailing global conditions, key valuation drivers and forward-looking catalysts, we outline our strategic outlook for the IPC and present our top equity picks.
Since the end of 2022, the equity market landscape has been characterised by a pronounced divergence across regions and sectors. Elevated valuations, particularly within the S&P 500, reflect a sharp compression in equity risk premia, suggesting that current market levels are increasingly dependent on resilient investor sentiment and supportive financial conditions.
Amid rising geopolitical complexity and growing concerns about US leadership in AI—exacerbated by DeepSeek’s competitive challenge— the Liberation Day announcement marked a significant inflection point in global markets. Investor sentiment quickly shifted from risk appetite to risk aversion, fuelled by escalating US policy uncertainty and a renewed turn toward protectionism. The immediate reaction was a sharp, uneven repricing across global equity markets, with US indices—particularly those heavily weighted in high-growth, richly valued sectors—reflecting the most pronounced correction.
This reaction underscored the vulnerability of high-Beta, duration-sensitive strategies in an environment marked by elevated macroeconomic risk and higher risk premiums. In contrast, the relative resilience of previously lagging indices, indicating a shift in capital allocation towards relative value opportunities rather than traditional defensive positioning.
The rebound since 8 April-despite its apparent strength-raises important questions about the durability of the rally. While headline indices have recovered or exceeded pre-correction levels, the rebound appears to be driven by sentiment dynamics, notably the ambiguity surrounding policy direction in the US.
The absence of an articulated global economic strategy and erratic signalling from policymakers have paradoxically been read as positive for risk assets, as they reduce the perceived immediacy of disruptive structural reforms. In effect, economic uncertainty about the magnitude of the policy impact has been replaced by uncertainty as to whether any coherent policy will be implemented at all—ironically fuelling a relief rally.
Despite elevated macroeconomic uncertainty and persistent geopolitical tensions, global equity markets continue to exhibit structurally low equity risk premiums, reflecting investor resilience. The sustained compression in ERPs, particularly in the US and growth-oriented sectors, underscores a risk-taking bias that may leave valuations vulnerable to shocks.
In this context, emerging markets such as Mexico continue to trade at a valuation discount relative to developed peers, as reflected in subdued forward P/E ratios. However, this discount appears more a reflection of persistent macro and political risk perceptions than intrinsic earnings weakness. Our view on the Mexican equity market remains neutral, given that the IPC has already met our year-end target and since the compression in ERP could prove fragile. Going forward, maintaining a selective, fundamentals-aware approach remains critical in navigating markets shaped more by liquidity and positioning than by broad-based earnings strength.
Still, we continue to identify opportunities. Our top picks are grounded in a disciplined framework that prioritises risk-adjusted return potential, sector-specific resilience, and valuation asymmetry. Since we set our scenario for 2025 (on 8-December-2024), our list of Top Picks has yielded an effective total return of 15.8%, 5.1pp higher than for the IPC. Our list is made up of Alfa, GCC, GFNorte and KOF, each with 20%, and a set of FIBRA with 5% in FMTY, 5% in FIBRAPL and 10% in FUNO.