Deutsche Bank's equity strategists trimmed their relative tilt toward U.S. equities to neutral on Monday, pointing to the growing likelihood that the Strait of Hormuz will reopen following a preliminary agreement between the United States and Iran to end their conflict.
U.S. President Donald Trump wrote on his Truth Social platform on Sunday evening: "The Deal with the Islamic Republic of Iran is now complete." The announcement followed confirmation from Pakistani Prime Minister Shehbaz Sharif, who acted as a mediator and said a pact had been reached.
A memorandum of understanding is due to be formally signed on Friday in Switzerland. Mr. Trump said the Strait of Hormuz would reopen the same day and that he had ordered an end to the U.S. blockade of Iranian ports.
Iran's Supreme National Security Council said military operations on all fronts, including in Lebanon, would end permanently starting Monday night. The council did not immediately disclose the precise terms of the agreement.
How the potential reopening alters Deutsche Bank's outlook
For Deutsche Bank's equity team, the prospect of the strait reopening alters the risk-reward trade they established at the start of the second quarter. At that time, one of the three pillars behind their preference for U.S. stocks was Europe's greater exposure to a closure of the Strait of Hormuz. The other two pillars were the relative appeal of U.S. technology names and a widening gap in earnings growth between the U.S. and Europe.
"Since then, U.S. equities have outperformed European equities significantly while the drivers might lose momentum," strategists led by Maximilian Uleer wrote in a note. "A re-opening would increase Europe's relative attractiveness, U.S. Tech has already rebounded significantly, and we expect the earnings growth gap to narrow from here."
The strategists emphasized that while these dynamics have prompted the change to a neutral stance, they are not yet revising sector-level recommendations. The team said it requires more tangible evidence of improvement before altering sector calls.
Sector implications
Deutsche Bank highlighted that consumer-facing sectors have been among the weakest performers since the conflict began. Autos, Consumer Staples and Luxury names have been pressured by several factors cited in the note: weaker consumer confidence, higher inflation, elevated oil prices and a rising interest-rate environment.
The strategists noted that a reopening of the Strait of Hormuz could gradually ease some of those headwinds, potentially improving conditions for consumer-oriented companies in Europe and elsewhere, but they reiterated that confirmation is needed before changing sector guidance.
Conclusion
The bank's adjustment reflects a reassessment of geopolitical risk following the U.S.-Iran preliminary agreement and the potential lifting of a specific regional supply disruption. While Deutsche Bank now views U.S. versus European equities on a neutral footing, it retains a watchful stance pending proof that the factors supporting this reassessment - including a sustained reopening of shipping through the Strait and a narrowing earnings gap - are realized.