- Those concerns continued to get off to a tepid start into September, but Madison Faller, global investment strategist at JPMorgan Private Bank, said in a research note on Friday that 2023 could still end strong.
- Goldman Sachs cut the probability of a US recession to 15%, and Jay Opperman, chief global equity strategist, said this was “not a bad environment” for stocks, although investors will need to be selective.
Traders on the floor of the New York Stock Exchange, August 15, 2023.
Source: New York Stock Exchange
Stock markets are having a tough month, but strategists at some of Wall Street’s biggest banks are cautiously optimistic that investors can find returns through the rest of the year and beyond.
Global stocks posted their second-worst month of the year in August, with overall MSCI world indices down 2.96%, according to LSEG data.
Risk sentiment was affected by rising bond yields amid expectations that interest rates will need to stay high for longer, along with growing concerns about the world’s second-largest economy, China.
This made for a tepid start to September trading, but Madison Faller, global investment strategist at JPMorgan Private Bank, said in a research note on Friday that 2023 could still end strong.
“Although there are still things we don’t know, reading from the major players — central banks, Wall Street, Main Street, and executives — suggests the outlook looks brighter today than it did a year ago,” Faller said. .
“After the late-summer stock boom, valuations appear less stretched than they did before, providing another opportunity to rebuild exposure to stocks – especially for those pockets of the market that have not risen as much this year.”
She also noted that currently high interest rates – with the Fed raising its key interest rate to the 5.25%-5.50% range in July – provide “a better entry point for bonds and more protection against any unexpected spikes.”
Federal Reserve Chairman Jerome Powell stressed at the central bank’s recent Jackson Hole symposium that the work on lowering inflation is far from done, but a sharp slowdown in the headline CPI and a resilient economy has fueled expectations of another pause in the hiking cycle this month.
The debate over the course of monetary policy has now moved from how high interest rates will rise to how long the Fed and other central banks will hold them at a high level.
“If inflation continues to slow at the same time that central banks are holding interest rates, this actually means that the real interest rate (the nominal interest rate minus inflation) is actually becoming more restrictive,” Faller said.
“Barring something unforeseen that spurs inflation to accelerate, this could pave the way for the Fed to cut interest rates in the future, even if Powell does not explicitly say so.”
Markets are anticipating the Fed’s first cut next summer, although other major central banks such as the European Central Bank and the Bank of England are lagging somewhat behind, given more persistent inflation in their regions.
Deviation from recession?
Although a slim majority of the market still expects a US recession in 2024, Goldman Sachs recently raised its estimate of that possibility to a level of 15% in any record year. The bank has long called for a “soft landing.”
“This is not a bad environment for stocks, especially when you also take into account that inflation has peaked, and although we believe interest rates will not fall as quickly as the market is pricing in, and that is a risk, it is not a very bad environment,” Peter said. Oppenheimer, chief global equity strategist at Goldman, told CNBC on Wednesday.
“However, alternative investments look attractive – cash and bonds – and that reduces the relative attractiveness of stocks, and I also think we have to acknowledge that we don’t see much in the way of earnings growth, so selectivity, I think, will continue to be crucial in a relatively benign index environment.” “
JP Morgan’s private bank also sees no recession, despite the possibility of higher interest rates for longer, and instead supports a “soft landing” — which involves a slowdown, but not a sudden stop, in economic activity.
There are some “vulnerabilities,” Faller noted, with 30-year fixed mortgage rates hitting a 22-year high in the U.S. in August, and with credit card delinquency rates rising from their very low base, along with… End of student loan repayment. Debt deferral.
“Even taking these challenges into account, consumers have not changed their behavior much. The latest measure of US retail sales showed that spending remains very strong, and the profits of large retailers indicate the same,” she added.
“Instead, more changes appear to be happening at the margins, as consumers shift away from brand names and toward some more economical options, redirecting back toward goods (e-commerce is actually accelerating) after a hot year for services. Disrupted by Covid. “
Opportunities in “Strong Balance Sheet Technology”
The prevailing theme of the latest earnings season has been upside surprises, with S&P 500 earnings contracting about 4%, versus an expected 7.3% decline heading into the quarter, according to private bank JPMorgan. Faller also stressed that 12-month earnings expectations for the S&P 500 have been rising steadily since March.
“The biggest concerns from last year also appear to be fading. References to things like ‘inflation’ and ‘economic slowdown’ have declined significantly, and most management teams appear to have been pleasantly surprised by the robustness of demand,” she added.
“As concern about the near term subsides, more companies are starting to focus on how to continue growth over the long term. Mentions of AI have risen dramatically, with companies across all industries increasing investments.”
Technology stocks, especially those heavily focused on artificial intelligence, have led a large portion of the market’s gains so far this year. Nvidia shares closed trading on Tuesday, up 232% since the beginning of the year, while shares of Meta, the parent company of Facebook, rose 149%, and Tesla shares rose 108%.
A strong earnings season appears to have restored confidence in recent weeks after the decline in early August, which was exacerbated by questions about whether soaring valuations for AI-related stocks have become too overvalued. The S&P 500 lost 1.77% in August, according to LSEG data.
Goldman Sachs’s Oppenheimer noted that the coming environment of higher yields on longer-dated bonds — and thus a higher cost of capital, which the market has not seen in more than a decade — is already starting to create differences between the company’s business models, as investors become selective.
“It’s starting to create more value attributable to strong companies with strong balance sheets, which generate cash and can potentially compound returns over time,” he told CNBC’s “Squawk Box Europe.”
“Technology has been a critical driver again in stock markets this year, but there is a big difference now between speculative and unprofitable technology that had very high valuations but has seen erosion as interest rates rise, and then a very strong and profitable balance. Panel technology, which is seen as “It’s more defensive.”
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