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That’s a good starting point. However, given this is a macro argument, where possible it makes sense to complement analysis of company fundamentals with a macro perspective. This Qi Watchlist contains 25 global stocks whose earnings rely on macro conditions in China. Here we focus on the five with the richest valuations, i.e. those most vulnerable if the consensus about slower Chinese growth is correct.

Adidas & Infineon Technologies are both out of regime. Low model confidence means idiosyncratic risks are more important than macro factors currently. For these, bottom up analysis is sufficient.

Asian financials HSBC & Standard Chartered are both around 6.0% rich to macro. Both want healthy economic growth (China tracking GDP, higher commodity prices) & rising interest rates (both real rates outright & steeper yield curves). All intuitive but, at these Fair Value Gaps, both have discounted a fair amount of good news. For those bearish on Chinese economic growth, they look vulnerable.

Richemont is the world’s second largest luxury goods firm & an obvious victim of President Xi’s “common prosperity” push. Yet spot price has been rallying of late & has now moved back towards the highs seen prior to Beijing’s focus on greater social equality. That has left it 6.7% rich to macro on Qi. Another efficient vehicle for those worried about downside risks in China.

The chart shows Qi’s model for large cap US Value versus Growth via the Vanguard ETFs VTV & VUG. The white line shows the spot VTV / VUG ratio heading lower once again. Growth is outperforming. In contrast, the red line shows Qi’s fair model value rising - macro fundamentals point to Growth underperforming. The divergence means Value is now one sigma (4.9%) cheap.

Unsurprisingly, such Fair Value Gaps don’t back-test well. Buying VTV vs. VUG at -1 sigma since 2009 produces a 47% hit rate. Don’t fight big tech basically! At least at these FVGs.

So why mention now? Both models are in strong & stable macro regimes; and both show the same highly intuitive set of drivers. Reflation (stronger growth, higher commodities, rising real rates & steeper yield curves) favour Value over Growth. So far, no surprise.

Note though that Fed & CB QT Expectations are the dominant driver. In the VTV vs. VUG model it alone accounts for 27% of model explanatory power. For those who follow the volatility markets (which is the proxy Qi uses to measure QT expectations) a big divergence has opened up between bond & equity vol. MOVE has been flirting with YTD highs; VIX is back well below 20.

Don’t fight big tech is tough to argue with. But, for anyone worried about equity market complacency relative to the message from the bond market, Growth as a style factor could be vulnerable & an interesting trade expression.

Having fallen out of regime late in August - & flagged the increased volatility experienced over September – the S&P500 has now seen model confidence rise by 35% in the last 4 weeks. We’re not quite there, but a new macro regime is on the verge of being formed. What's driving the new regime? First & foremost US equity bulls need tight credit spreads.

In addition, the new regime shows SPX rises when Fed rate expectations rise & the yield curve flattens. While a flatter yield curve suggests the bond market is worried about forward growth, the equity market see’s a Fed policy stance that is ahead of the curve.

A pre-emptive Fed that hikes earlier, means less rate hikes overall. Money markets might be pricing a higher terminal rate than before, but it’s still a contained hiking cycle relatively speaking.

The real policy error is a Fed that’s behind the inflation curve. Policy that is too lax for too long means the bond vigilantes steepen the yield curve & that’s a negative for US equities on current patterns.

This is not yet a confirmed regime & factor leadership could yet evolve further before model confidence crosses the 65% threshold. One dynamic we are watching closely is a new pattern of negative sensitivity to inflation expectations. That implies “bad” inflation for equity markets – the type that compresses margins &/or forces a Fed policy response (one with a higher terminal rate).

Tracking these shifting relationships is tricky but Qi provides a transparent framework.

As we enter earnings season it is evident that the inflation dynamic continues to deteriorate for US single stocks. “US equities & inflation - a regime shift?” first flagged the shifting pattern by isolating individual stocks independent sensitivity to inflation expectations.

The orange line showing the number of stocks with positive sensitivity to US inflation expectations has fallen to a fresh low. Just 117 S&P500 stocks in macro regimes now see rising inflation as a tailwind for performance. That’s around a third of the total that were enjoying the reflation bounce in Q1.

Back in March, the number of stocks in regime with a negative relationship (“headwind”) was effectively zero - the reflation narrative was all encompassing. Now that number is 41.

That total of 158 stocks shows the degree to which US equities remain out of regime. Currently non-macro factors are bigger drivers of price action than economic fundamentals, financial conditions or risk appetite. Qi has repeatedly demonstrated that leaves the market more vulnerable to transient factors like positioning, flow & sentiment – all of which are inherently more susceptible to bouts of volatility.

At the index level, model confidence for the S&P500 is now back at 50%, up 34% in the last 2 weeks alone. A new macro regime appears to be forming & sensitivity to inflation has just edged into negative territory. A major macro shift appears to be on the cusp of confirmation.

Increased freight & warehouse costs could yet compress margins but, for those anticipating decent volumes in the months ahead, it is worth noting that, on Qi, US retailers (XRT) currently screen as cheap versus the broader market (SPY).

The XRT vs. SPY ratio is 6.25% below macro-warranted model value. That’s the biggest deficit to macro fair value in the last year.

It is also a statistically significant level. There have only been 10 instances since 2009 where XRT vs. SPY has been this far below model fair value when in regime. Buying the dip at that level elicits a 60% hit rate for an average return of +0.8%.

The macro regime is all about domestic & global reflation. Retailers outperform the broader market when US real rates are rising, the yield curve is steepening & when global growth (China GDP plus commodities) are robust. A strong Dollar is the biggest single negative.

For those who believe in US consumers & their appetite to fuel a robust shopping season, this looks like an attractive entry level to play upside amongst US retail stocks.