Furthermore, Wells Fargo recognizes the lower political uncertainty in Europe following the French presidential vote – which could push the euro higher – and a U.S. administration that hasn’t delivered on some of its campaign pledges.
However, it sees the upcoming Italian elections as a large political and economic risk to the euro area. “Put another way, at current levels on the currency pair, it seems that expectations for the U.S. government to get anything done are too low and for the euro are too high,” Samana said. The euro was trading at 1.188 against the dollar early on Tuesday morning.
Lastly, analysts at Wells Fargo said that investors have become the most negative on the U.S. dollar since 2014, “which sets the stage for positive surprises in the U.S. dollar’s favor in the second half (of the year).”
“The most important implications for investors at this point would be to reduce positions in commodities and developed-market debt towards our current tactical underweight stance,” Wells Fargo suggested.
Wells Fargo believes that earnings growth in the second half of 2017 will be lower than in the first six months but suggests that four sectors are set to outperform the wider market: consumer discretionary, financials, health care and information technology.
“We recommend investors use any pullbacks as opportunities to average into shares of quality cyclical companies,” the note said.