Despite persistent inflation, fears of recession, weak second quarter earnings, and a persistent bear market, JP Morgan strategist Mislav Matejka remains bullish on stocks.
Matejka said in a note, “We believe that risk reward for equities is not all bad as we move into year-end. In fact, we argued that we have entered the phase where the weak dataflow can be seen as good, leading to a [Fed] policy pivot, and the activity slowdown might prove to be less deep than feared.”
Matejka cited 10 reasons for his optimism. First, he argues valuations, both compared to fixed income and in absolute terms, are attractive. He also notes, institutional investors have elevated cash levels burning a hole in their pocket, and are getting eager to see that money put to work building returns.
He also notes investor sentiment is presently too bearish, which is often seen at the bottom of a market, before the tide turns, and investors begin jumping back into the market.
In addition, Federal Reserve hawkishness may have peaked after two consecutive 75 basis point hikes, meaning fear of the Fed will abate to some degree going forward.
Also, the dollar has likely peaked, meaning investors will want to get their cash into equities. And as they will want to move into equities, the economic slowdown has been mild enough that even despite two consecutive quarters of negative growth, there is still a debate if this is even a recession.
Data also shows higher income consumers have remained resilient, and are still spending, and consumers are also sitting on excess savings they built up during the recession. And he argues that altogether, that means earnings estimates are likely marked down aggressively.
Finally, he argues that it is unlikely there will be a synchronized global downturn, and that will mean investors will find equities to invest in.
It is not a view shared by all of his peers, however.
Morgan Stanley’s Mike Wilson said in an interview, the S&P 500 might lose as much as 8% from current levels by the fall, given that overall conditions, including slowing corporate earnings growth, and the rising interest rates being produced by the brutal inflation could all cause the S&P 500 to take out the June lows over the next few months.
Wilson says he is counseling clients to operate more defensively, and not be afraid to hold more cash than they normally would. However he notes, if a selloff happens, it could very well be the very start of the new bull market for 2023.
Meanwhile, David Kostin at Goldman Sachs has massively scaled back his 2023 profit estimate. He now predicts the 2023 EPS for the S&P 500 only growing at 3%, down from his previous estimate of 6%, and well below analyst predictions of 7%.
Kostin listed almost 70 companies he said were vulnerable to seeing downward profit revisions, including big names such as T-Mobile, Lockheed Martin, Honeywell, Electronic Arts, and Yum! Brands.
Kostin said, “We expect limited upside to the S&P 500 through year-end, given our economists’ above-consensus inflation forecast, the prospect for higher real yields, and the constraints on Fed policy from the surge in stock prices that has eased financial conditions since mid-June.”
