When leading market strategists on Wall Street turn bearish as a group, this may be a major cause for concern, given their inherent bias towards bullish optimism. “A lot of the gains for the year have already been booked. We’re up 19% in the first half of this year in the S&P 500, it’s a great start. I don’t think anybody supposes we’re going to annualize that number," as Arthur Hogan, chief market strategist at National Securities Corp., told Bloomberg.
“The risks are to the downside and it makes sense to take some profit, rebalance and hold more cash.” as Samantha Azzarello, global market strategist for JPMorgan ETFs, was quoted in the same story. “Eventually you’ll find it harder and harder to make new highs,” warned Shawn Cruz, manager of trader strategy at TD Ameritrade. Indeed, a majority of strategists surveyed by Bloomberg expect the S&P to close 2019 lower than it is now.
Significance for Investors
As the U.S.-China trade conflict remains unresolved, and in the face of slowing economic growth, the consensus estimate among equity analysts is calling for year-over-year (YOY) declines in S&P 500 earnings of 1.7% in 2Q 2019 and 0.2% in 3Q 2019, per data collected by S&P Capital IQ. "Actual EPS exceeded initial estimates in each of the last 29 quarters by an average of nearly four percentage points," Sam Stovall writes about these projections in the Q2 Earnings Outlook from research firm CFRA, where he is chief investment strategist.
While Stovall believes that the consensus is likely to be too pessimistic, Mike Wilson, the chief U.S. equity strategist and chief investment officer (CIO) at Morgan Stanley, says the opposite. "Growth expectations into the back half of the year and next year remain too high. Our Leading Earnings Indicator and Morgan Stanley Business Conditions Index both suggest that further downward revisions are ahead. The second half of the year tends to be a seasonally weaker time for earnings revisions," he writes in a recent edition of the Weekly Warm Up report from U.S. Equity Strategy at Morgan Stanley.
Wilson's price targets for the S&P 500 in mid-2020 are bull case, 3,000, base case, 2,750, and bear case, 2,400. The index closed at 2,975.95 on July 8, 2019, meaning that these scenarios represent, respectively, an 0.8% gain, a 7.6% loss, and a 19.4% loss from current values. As examples of other firms' forecasts for year-end 2019, RBC calls for 2,950 (-0.9%) and Citigroup projects 2,850 (-4.2%), Bloomberg reports.
While the consensus among leading strategists has trended towards bearish, some remain unabashedly bullish. Maneesh Deshpande of Barclays put 65% odds on a "melt-up" that sends the S&P 500 to 3,260 (+9.5%), while Thomas Lee of Fundstrat Global Advisors believes that his target of 3,125 (+5.0%) actually is conservative, Barron's reports.
Lee notes that the S&P 500 historically has advanced by an average 18% in the 9 months after the Federal Reserve's first interest rate cut following a round of increases. However, stocks pulled back on Monday, July 8 in the wake of a strong jobs report on Friday, leading investors to conclude that a pivot to rate cutting by the Fed is now less likely, The Wall Street Journal reports.
Despite the upbeat jobs report, Bloomberg notes that most economic data shows evidence of a slowdown. Meanwhile, Mike Wilson of Morgan Stanley warns that "An accommodative Fed could cushion the blow, but likely won't prevent it."