Stocks recovered from their recent slide on Monday.
But bearish Wall Street strategists still see major concerns that won’t go away anytime soon for stock investors.
As expectations for interest rate cuts from the Federal Reserve fade, signs of inflation remain persistent, and stocks still trade at above-average valuations, many believe the market is in a similar position to where it was at the start of its three-month recession in late summer and fall 2023.
“Price developments may depend on earnings and may stabilize in the near term,” Marko Kolanovic, JPMorgan’s chief market strategist, wrote in a note Monday. “Beyond that, however, we believe the sell-off should continue. We remain concerned about continued complacency in stock valuations, continued inflation that is too high, the Fed’s continued repricing of rates and the earnings outlook in which the implied acceleration this year could end optimistic as well.”
“Current market discourse and trends increasingly resemble those of last summer, when upward inflation surprises and hawkish Fed revisions led to a correction in risk assets, but positioning of investors now seems higher.”
Last summer, markets became increasingly pessimistic about the likelihood of an upcoming interest rate cut by the Federal Reserve. This contributed to a rapid rise in bond yields, which ultimately weighed on stocks.
Julian Emanuel, who leads Evercore ISI’s equities, derivatives and quantitative strategy, recently told Yahoo Finance that things are also looking up like last summer.
Emanuel has been closely watching the 2-year Treasury yield, which recently hit 5% for the first time since November 2023. Stocks then sold off alongside the move.
“The reason this might be more concerning at this point is the implicit promise that markets have been trading on of the three [Fed rate] “The discounts have been reduced,” Emanuel said. “And if you look at this since March, I think it’s much more than a coincidence that the market came off the highs literally at the precise moment that the market started to price in less than the promised three cuts.”
Mike Wilson, Morgan Stanley’s chief investment officer, wrote in a research note Sunday that with the 10-year Treasury yield (^TNX) now well above the critical level of 4.35 to 4.40 percent that he monitored, higher yields could weigh on stock valuations. move forward.
“If yields remain at current levels over the next three months, multiples could see a decline of around 5% over that period, all else being equal (which would equate to 4,700-4,800 on the S&P 500),” Wilson wrote.
Wilson notes that with yields high, any upside from here “will largely have to be earned through rising earnings rather than multiple expansion.”
