Recently, U.S. stock investors are paying close attention to corporate earnings reports and economic data.
Better-than-expected corporate earnings and strong labor market data eased investor fears of an impending recession in the U.S. economy in recent weeks, helping stocks bounce back from their lows.
A key inflation data showed a better-than-expected slowdown in price increases. That has led to speculation about whether inflation has peaked and whether the Fed will need to raise rates as aggressively as expected when it meets next month.
The headline consumer price index (CPI) rose 8.5% year-on-year in July, unchanged from June. Economists had expected an increase of 8.7%. Core inflation, which strips out volatile food and energy prices, was also lower than expected.
Ed Moya, senior market analyst at Oanda, said while July CPI showed inflation was heading in the right direction, boosting investor sentiment, there could be more pain to come.
”We’re in a wait-and-see mode, we’ll see if inflation continues to ease rapidly, but we’re not out of the woods yet,” he said. “It’s still a market vulnerable to inflation.” Cautious
Meanwhile, there is optimism that the S&P 500 will break its two-quarter losing streak, having gained 9% so far in the third quarter.
”Our global sell-side recommendation index is back at the bull market peaks reached in 2000 and 2007, after which global equities have halved,” said a team led by Citi’s chief global equity strategist, Robert Buckland.
Citi via A global sell-side call option index is calculated by aggregating the call options index for all stocks in the MSCI index, ranging from 5 (indicating a strong buy) to 1 (indicating a strong sell). Currently, their index is above 3 almost everywhere.
Citi notes that analysts are never net sellers of stocks, even in bear markets. While analysts seem to be getting more bullish as the stock market rises, it’s also possible that “the market is rising because they’ve become more bullish.”
Regardless, Citi believes that what happened in 2000 and 2007 is still notable. US
investment bank Goldman Sachs believes that the US stock market has not completely bottomed out. ”Despite the recent rebound in our positioning metrics, we haven’t crossed the real trough in our positioning as future moves are likely to be more reliant on macroeconomic data,” analysts at Goldman Sachs said. In fact, if there is no positive turnaround on the macro front, a temporary improvement in sentiment could actually increase the risk of another downturn in the market. The current positive shift is not coming from fundamental investors. ”Without broader investor confidence in the health of the rebound, current low volatility levels may be difficult to sustain, in which case a systemic approach could quickly reduce risk sentiment,” Goldman Sachs believes. According to Goldman’s market indicators , investors’ bearish sentiment has yet to reach the level that usually marks a true bottom. Analysts at the bank said: “We haven’t actually reached this level, which shows that the stock market still has room to fall, especially after a brief rally. Once the real bottom is reached, it will take an average of three months to recover to the pre-trough. level.” Goldman Sachs is not the only investment bank predicting that the market has not yet bottomed. EvercoreISI strategist Julian Emanuel agrees, arguing that investors may have been overly optimistic after the July rally. The bear market has yet to bottom out, and September will see more volatility. The strategist believes that slowing economic growth and troubling signs of bond yields could mean more trouble for stocks. “The story of falling yields may be over and that’s a headwind for stocks, but the options market is telling you that people aren’t really too worried,” Emanuel said. ”For us, that’s typical The late August to September cycle, which tends to be a dangerous month.”
The strategist advised investors to continue to buy low and sell high and hold cash to take profits if stocks retest June lows.
Macro deterioration David Kostin, chief U.S. equity strategist at
Goldman Sachs , said investors should brace for tough times ahead, with some stocks in particular facing unsustainable profit growth expectations.
The macro outlook has deteriorated in recent months, he said. While the company still forecasts 8% year-over-year EPS growth in 2022, it has lowered its forecast for 2023 EPS growth to 3% from 6%.
“U.S. and global growth is slowing, the dollar is strengthening, and inflation is higher than we previously assumed in our top-down model. Economic growth is the main driver of EPS growth, and our economists now predict, U.S. real GDP growth will average 1.1% in 2023 (previously 1.6%),” Kostin said.
He also forecasts that net profit margins will increase by 9 basis points by the end of 2022 and decline by 25 basis points by 2023.
”We expect margins to contract in 2023 across industries led by materials, energy and healthcare,”
Kostin said, noting that earnings per share for some companies are likely to be lower in 2023, given recent margin movements. down. He believes a re-acceleration of profitability will be challenging against a macro backdrop of decelerating growth (possibly a recession) and inflation remaining high, albeit down.
Value vs. Growth A long-term trend in the U.S. stock market has suddenly reversed
since the start of the year: Growth stocks, which had previously rallied strongly, have been battered, while value stocks have begun to outperform at a time when the stock market is on the verge of big annual losses.
Over the years, extremely low interest rates and inflation have prompted investors to put money into big tech and growth stocks. But the Fed’s plans to raise interest rates and rein in its balance sheet have prompted a dramatic reversal of that dynamic since late 2021.
Specifically, since 2021, the Russell 1000 Value Index has significantly outperformed the Russell 1000 Growth Index. The Russell 1000 Value Index is down just 12% since the start of the year, while the Russell 1000 Growth Index is down nearly 36%.
It was the strongest performance of value stocks relative to growth stocks in the 20 years since the dot-com bubble burst, Bank of America said.
However, since early July, the trend has reversed, with growth stocks rebounding.
Still, BofA chief quantitative analyst Savita Subramanian is more bullish on value stocks, and BofA generally expects value stocks to outperform growth stocks over the next few years as inflationary pressures are stronger than what the market currently expects. The “stickiness” of the reflection is greater.
Investors may be underestimating the staying power of inflation, said Larry Cordisco, a portfolio manager at Osterweis Capital Management. If the “peak inflation” bet holds true, so does the long-term bet on growth stocks. But the reality remains that there are a number of long-term hurdles that could keep inflation well above the Fed’s 2% target, including infrastructure hurdles that could limit U.S. crude production and housing construction.