Stocks rebounded from recent weakness on Monday.
But bearish Wall Street strategists still think key concerns for stock investors aren't going away anytime soon.
With expectations for Federal Reserve rate cuts waning, signs of inflation remaining strong, and stocks still trading at above-average valuations, the market is likely to see three-month forecasts in late summer and fall 2023. Many people think we are in a similar situation to when we entered the downturn.
“Price trends may be driven by earnings and may stabilize in the near term,” Marko Kolanovic, chief market strategist at JPMorgan, said in a note Monday. “But beyond this, we think the stock market decline will continue further. Continued complacency in stock valuations, persistently high inflation, further Fed rate hikes, and an implied acceleration this year go too far. “We remain concerned about the likely earnings outlook.” “
“While the current market story and pattern increasingly resembles that of last summer, when upside to inflation expectations and hawkish Fed revisions prompted a correction in risk assets, investor positioning now It seems to be increasing.”
Last summer, markets became increasingly pessimistic about the possibility of an upcoming Federal Reserve rate cut. This led to a rapid rise in bond yields, which ultimately weighed on stocks.
Julien Emmanuel, head of equities, derivatives and quantitative strategy at Evercore ISI, recently told Yahoo Finance that things are looking as good as they were last summer.
Mr. Emanuel has recently been keeping a close eye on the two-year Treasury yield, which has hit 5% for the first time since November 2023. Stocks were subsequently sold off in parallel with this move.
“The reason it's more concerning at the moment is because of the implicit promise that the market is trading on three factors.” [Fed rate] “And if you look back to March, I don't think it's just a coincidence that the market reversed from its highs literally the moment it started to fall below the three promised,” Emanuel said. Cut. ”
Mike Wilson, Morgan Stanley's chief investment officer, said in a research note on Sunday that the 10-year Treasury yield (^TNX) is now firmly above the critical level of 4.35% to 4.40% that he has been eyeing. He said rising yields could weigh on stock valuations. We are moving forward.
“If yields remain at current levels over the next three months, all else being equal, the multiple could face up to a 5% downside over that period (4700-4800 for the S&P 500). equivalent),” Wilson wrote.
Wilson notes that with yields rising, any upside from here “will have to be earned primarily through earnings upside rather than multiple expansions.”
