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.
Markets entered a three-month slump in late summer as expectations for Federal Reserve interest rate cuts faded, signs of inflation remained strong and stocks still traded at above-average valuations. Many people think they are in a similar situation. And in the 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.”
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 easily above the critical level of 4.35% to 4.40% that he has been eyeing. , said rising yields could weigh on stock prices. Evaluation moves forward.
“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 notes that with yields rising, any further upside from here “often needs to be captured through earnings upside rather than multiple expansions.”
