(Bloomberg) — Investors are low on confidence in US stocks, even after this month’s surge: most say the market has not yet bottomed out due to concerns over corporate earnings.
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That’s the view of about 70% of the 383 respondents in the latest MLIV Pulse survey, with the largest weighting – 35% – saying the lows won’t be until the second half of 2023. Less than a quarter estimate the stocks have already reached their trough. The findings show how shocked investors remain after last year’s stock market crash, with growing concerns about the outlook for corporate earnings as the economy slows.
As we drive towards the changing landscape, nearly half of participants say the key for stocks this week is Apple Inc., Meta Platforms Inc.’s quarterly results. and Exxon Mobil Corp. will be, rather than the Federal Reserve’s decision or what Chairman Jerome Powell says Wednesday. The central bank is widely expected to hike interest rates by a quarter point on February 1, the smallest increase in nearly a year.
“There is a lot of negativity and uncertainty among investors right now – and with good reason,” said Michael Sheldon, chief investment officer at RDM Financial Group. “It is a difficult time as financial conditions have eased in recent months with stock prices rising, which is not what the Fed wants as it tries to slow down the economy to curb inflation.”
The S&P 500 index enters this week with a 6% gain in 2023, on the pace of its best January since 2019, as signs of declining inflation and cooling growth have fueled bets that the Fed is close to ending the her tightening cycle. Yet the most aggressive rate hikes in decades, combined with a spiral of price and wage increases, have created a challenging environment for companies to grow profits.
About 90% of respondents expect inflation to continue to fall in 2023, but to remain above the Fed’s 2% target. That ties into equities doubts, as the question of how long inflation will remain high has made it difficult for investors to position themselves in 2023.
Stock bulls are firmly outnumbered, with only 18% of survey participants saying they expect to increase their exposure to the S&P 500 in the coming month. More than half say they will keep their exposure the same, while about 27% expect to reduce it.
The overarching question as revenue rolls in is the trajectory of growth. The US economy is showing signs of a slight slowdown that the central bank would like to see as it tries to contain inflation without triggering a sharp downturn.
Forecasters expect US economic activity to contract in the second and third quarters.
“This could be the most anticipated recession the US has ever had, if it happens, and some economic indicators already indicate it is likely,” said Sheldon of RDM Financial Group. “The stock market has probably bottomed out, but I wouldn’t be surprised to see more weakness coming in the spring as investors factor in weaker economic data and lower earnings.”
Bond traders expect the economic picture to be so bad that the Fed will have to cut later this year, with swap prices the US central bank first raises its key rate to just under 5% or less by mid-2023. Part of that bet is the inflation is expected to continue to fall, giving the Fed room to turn.
“History shows that nine months after the last rate hike, the Fed tends to cut rates,” said Sam Stovall, CFRA Chief Investment Strategist, in an interview with Bloomberg TV.
That contrasts with the message from a string of Fed officials who said they will raise rates by more than 5% this year, not cut them.
More than half of survey participants said they agree with Jeffrey Gundlach, Chief Investment Officer of DoubleLine Capital LP, that it’s best to watch what the bond market says about the Fed’s path — as opposed to signals of central bank officials.
Read more: Gundlach says to listen to the bond market instead of watching interest rates
The obvious risk is that it could turn out to be wishful thinking on the part of shareholders who were duped last year when the Fed reacted aggressively to rampant inflation and Treasury bond yields soared.
Some investors are warning against fighting the Fed, especially with corners of the economy — such as the labor market — showing resilience in the face of higher borrowing costs. If the Fed wins the chicken game of this cycle, survey pessimists would be prescient.
“The Treasury market is quite complacent,” said Tracy Chen, portfolio manager at Brandywine Global Investment Management. “I don’t think the Fed will cut rates this year as it probably isn’t happy with the job market situation. So there could be another sell-off in Treasuries.
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