Stocks rebounded Monday from recent weakness, but some bearish Wall Street strategists still don’t see concerns for investors going away anytime soon.
With expectations that the Fed will cut interest rates waning, signs of inflation remain strong and stocks still trading at above-average valuations, the market is in a similar position to the one that entered the three-month economic downturn in 2016. Many people think that there is. From late summer to fall of 2023.
“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 potential 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.”
In late summer 2023, the market became increasingly pessimistic about the Fed’s interest rate cuts. Investors interpreted comments from Chairman Jerome Powell at the Fed’s board meeting last September to mean the central bank was likely to keep interest rates higher for longer than most expected. This weighed on stock prices over the next month as bond yields soared.
At the time, Fed officials were still debating another rate hike as economic data continued to be stronger than expected. Although there is no indication of a rate hike this time around, a growing number of economists are raising the idea that the Fed may not be able to cut rates at all this year because economic growth is stronger than expected.
This caused a familiar reaction in the market. Bond yields soared as investors scaled back bets on interest rate cuts, with the consensus having gone from expecting up to seven rate cuts this year in January to now expecting fewer than two. Stock prices have entered their worst drawdown this year.
Julien Emanuel, head of equities, derivatives and quantitative strategy at Evercore ISI, recently told Yahoo Finance that the current market movement is reminiscent of before last year’s pullback.
Mr. Emanuel has been keeping a close eye on the two-year Treasury yield, which hit 5% a week ago, a critical level for investor sentiment, for the first time since November 2023. The stock was then sold. Two-year U.S. Treasury yields ended Monday at nearly 4.97%.
Emanuel said the rise in two-year Treasury yields is a cause for concern. Stocks were rising on the Fed’s “tacit promise” to cut interest rates three times this year.
“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 the market started pricing in less than the three promised cuts,” Emanuel said. said.
Mike Wilson, Morgan Stanley’s chief investment officer, said in a research note on Sunday that the 10-year Treasury yield (^TNX) is currently easily above a critical level of 4.35% to 4.40%, and rising yields are likely to influence future stock prices. He said that this could weigh on the evaluation.
“If yields remain at current levels over the next three months, the multiple could face up to a 5% downside over that period (4700-4800 for the S&P 500), all else being equal. equivalent),” Wilson wrote.
Wilson said that with yields rising, any upside from here “will largely come from earnings upside rather than multidimensional expansion.”
This week, Meta Inc. (META), Microsoft Inc. (MSFT), Alphabet Inc. (GOOGL, GOOG), Tesla Inc. (TSLA), and Chipotle Inc. (CMG) are all scheduled to report earnings in a busy week of reporting for the S&P 500. ing.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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