Can stocks finish strong in 2023? The giants of Wall Street are weighing heavily

Stock markets are having a tough month, but strategists at some of the biggest banks on Wall Street are cautiously optimistic that investors can find returns through the rest of the year and beyond.

Global stocks posted their second-worst month of the year in August, with MSCI World Indices totaling down 2.96%, according to LSEG data.

Risk sentiment was affected by the rise in bond yields amid expectations that interest rates will need to remain high for a longer period, along with growing concerns about the second largest economy in the world, China.

This led to a tepid start to September trading, but Madison Faller, global investment strategist at private bank JPMorgan, said in a research note on Friday that 2023 could still end strongly.

“Although there are still things we don’t know, the reading from the major players – central banks, Wall Street, Main Street, and executives – suggests that the outlook looks brighter today than it did a year ago,” Waller said. .

“After the stock boom of late summer, valuations seem less stretched than they used to be, providing another opportunity to rebuild exposure to equities – especially for those pockets of the market that haven’t risen as much this year.”

She also noted that currently higher interest rates – with the Fed raising its key rate to a range of 5.25%-5.50% in July – provide “a better entry point for bonds and more protection against unexpected hikes”.

Fed Chairman Jerome Powell emphasized at the central bank’s recent Jackson Hole Symposium that work to bring down inflation is not done, but a sharp slowdown in headline consumer prices and a resilient economy fueled expectations of another pause in the hiking cycle this month.

The discussion about the path of monetary policy has now moved from how high interest rates are to how long the Fed and other central banks will keep them at a high level.

“If inflation continues to slow at the same time that central banks are holding interest rates, then that actually means that the real interest rate (the nominal interest rate minus inflation) is actually becoming more restrictive,” Waller said.

“Barring something unexpected that triggers inflation to accelerate, this could pave the way for the Fed to cut interest rates in the future, even if Powell doesn’t say it outright.”

Markets are anticipating the first cut by the Fed next summer, although other major central banks such as the European Central Bank and the Bank of England lag somewhat, given more persistent inflation in their regions.

Deviation from recession?

Although a slim majority of the market still expects a US recession in 2024, Goldman Sachs recently raised its estimate of that possibility to as high as 15% for any record year. The bank has long called for a “soft landing.”

“This isn’t a bad environment for equities, especially when you also take into account that inflation has peaked, and although we think interest rates won’t come down as fast as the market is pricing in, and that presents a risk, it’s not a very bad environment,” Peter said. Oppenheimer, chief global equity strategist at Goldman, told CNBC on Wednesday.

“However, alternative investments look attractive – cash and bonds – and that reduces the relative attractiveness of equities, and I also think we have to admit we don’t see much in the way of earnings growth, so selectivity, I think will continue to be critical in a relatively benign index environment. “

JPMorgan Private Bank also sees no recession, despite the possibility of higher interest rates for longer, and instead supports a “soft landing” – which implies a slowdown, but not a sudden stop, in economic activity.

Waller noted that there were some “weaknesses”, with 30-year fixed mortgage interest rates hitting a 22-year high in the US in August, and with credit card delinquency rates rising from their very low base, along with End of student loan repayment. Debt deferral.

“Even with these challenges in mind, consumers haven’t changed their behavior much. The latest measure of retail sales in the US shows that spending is still very strong, and profits for large retailers say the same,” she added.

Instead, more changes seem to be happening at the periphery, as consumers shift away from brand names and towards some more economical options, reorienting back toward commodities (e-commerce is actually accelerating) after a hot year for services that were disrupted by Covid. “

Opportunities in “Strong Balance Sheet Technology”

The dominant theme of the latest earnings season has been bullish surprises, with the S&P 500 earnings contracting by around 4%, versus an expected decline of 7.3% heading into the quarter, according to JPMorgan Private Bank. Waller also stressed that the 12-month earnings outlook for the S&P 500 has risen steadily since March.

“The biggest fears from last year also seem to be fading away. References to things like ‘inflation’ and ‘economic slowdown’ have subsided significantly, and most management teams seem pleasantly surprised by the robustness of demand,” she added.

“As anxiety about the near term subsides, more companies are starting to focus on how they can sustain long-term growth. Signals to AI have skyrocketed, with companies across all industries stepping up investments.”

Technology stocks, especially those that focus heavily on artificial intelligence, have led a large portion of the market’s gains so far this year. Nvidia shares closed Tuesday’s trading up 232% year-to-date, while Meta shares, the parent company of Facebook, rose 149%, and Tesla shares rose 108%.

A strong earnings season appears to have restored confidence in recent weeks after a plunge in early August, which was exacerbated by questions about whether the skyrocketing valuations of AI-related stocks had become too overvalued. The S&P 500 lost 1.77% in August, according to LSEG data.

Oppenheimer of Goldman Sachs noted that the upcoming environment of higher yields on longer-dated bonds — and thus a higher cost of capital, which the market has not seen in over a decade — is already starting to create differences between the company’s business models, as investors become selective.

“It’s starting to create more value attributable to strong companies with strong balance sheets, which generate cash and can lead to multiple returns over time,” he told CNBC’s “Squawk Box Europe”.

“Technology has been a critical driver again in stock markets this year, but there is a big difference now between a speculative and unprofitable technology that had very high valuations but eroded as interest rates rose, and then a very solid and profitable balance sheet technology, which is seen “It’s more defensive.”