Analysts See Brighter Outlook for Stocks Despite Recent Challenges
Stock markets recently weathered a challenging month, but analysts at some of Wall Street’s major financial institutions maintain a cautious optimism about the potential for returns throughout the remainder of the year and beyond.
In August, global stocks experienced their second-worst month of the year, with the MSCI broad aggregate of world indexes declining by 2.96%, as reported by LSEG data. The decline in market sentiment was attributed to rising bond yields, driven by expectations of prolonged higher interest rates and growing concerns regarding China’s economic stability.
While the early days of September have seen a lukewarm start, Madison Faller, a global investment strategist at JPMorgan Private Bank, conveyed in a recent research note that there is still room for a strong finish to 2023.
Faller remarked, “Despite lingering uncertainties, feedback from key players including central banks, Wall Street, Main Street, and corporate leadership suggests a more promising outlook today compared to a year ago.” She added, “Following the late-summer stock downturn, valuations appear less stretched, presenting an opportunity to rebuild equity exposure, especially in segments of the market that haven’t rallied significantly this year.”
She also highlighted the current higher interest rates, a result of the Federal Reserve’s rate hike to a range of 5.25%-5.50% in July, as potentially providing a more favorable entry point for bonds and increased protection against unexpected spikes.
Although Federal Reserve Chair Jerome Powell reiterated the central bank’s commitment to addressing inflation, recent data indicates a deceleration in consumer prices, raising expectations of a pause in the rate-hiking cycle this month.
The debate surrounding monetary policy has shifted from how high rates will rise to how long central banks will maintain elevated rates. Faller pointed out, “If inflation continues to cool while central banks hold rates steady, it implies a more restrictive real policy rate (the nominal policy rate minus inflation). This could set the stage for the Fed to cut rates in the future, even if Powell doesn’t explicitly state so.”
Markets currently anticipate the first Fed rate cut to occur next summer, although other major central banks like the European Central Bank and the Bank of England lag behind due to persistent inflation in their regions.
While some still anticipate a U.S. recession in 2024, Goldman Sachs has lowered its estimate for this possibility to 15%, describing it as a “soft landing,” which isn’t unfavorable for equities. Peter Oppenheimer, Goldman’s Chief Global Equity Strategist, noted that while alternative investments like cash and bonds may become more attractive, equities still have appeal in this environment.
JPMorgan Private Bank shares a similar perspective, foreseeing a “softish landing” rather than a recession, despite expectations of higher interest rates. Faller acknowledged challenges such as record-high 30-year fixed mortgage rates, rising credit card delinquencies, and the end of the student debt moratorium. However, consumer behavior has remained relatively stable, with recent retail sales data indicating solid spending.
The latest earnings season brought positive surprises, with S&P 500 earnings contracting less than expected. Additionally, 12-month earnings expectations for the S&P 500 have been on the rise since March. Mentions of concerns like “inflation” and “economic slowdown” have decreased significantly, and companies are increasingly focusing on long-term growth, with a surge in mentions of “AI” across various industries.
Technology stocks, particularly those emphasizing AI, have been a significant driver of market gains this year, with notable increases in stock prices for companies like Nvidia, Meta (formerly Facebook), and Tesla.
While challenges persist, a strong earnings season has restored confidence in recent weeks, and investors are becoming more selective amid rising bond yields. Companies with strong balance sheets and cash generation capabilities are being favored in this environment, particularly in the technology sector, differentiating them from speculative, unprofitable tech companies that have seen their valuations erode as interest rates climb.
