It is not easy to find optimistic investors on Monday, following a significant increase in the S&P 500 after positive employment figures and the resolution of the debt ceiling issue, which has brought the market to the brink of a bull market. However, it is not a bad situation as the technology sector is only slightly down, and oil prices are rising thanks to OPEC’s promise of a further production reduction.
Neil Wilson, who is the chief market analyst at Finalto, has pointed out that the current rally is not being embraced by investors as the SPX has exceeded 4,200 and has moved beyond its range of 4,000 to 4,200. Additionally, the VIX has dropped to its lowest levels since February of 2020.
The events of Friday showed us that the strong performance of Big Tech can have a ripple effect throughout the market, potentially leading to a change in sentiment from Wall Street skeptics. However, for now it seems that those who did not sell their investments in May are being advised to do so in June. Despite this, there are still concerns that investors may not be completely out of danger. Morgan Stanley’s “Worried” Mike Wilson, a bearish strategist, predicts a significant earnings decline (-16% year-over-year) that the market has not yet accounted for. Though his S&P 500 prediction remains at 3,900, which is the low end of the Street’s expectations, Wilson believes that investors are in the midst of several “hotter but shorter” earnings cycles within a broader secular bull market. He characterizes the overall trend as boom, bust, boom.
According to Wilson, the bank’s predictions of a significant decrease in stock prices have been thwarted by the impressive performance of artificial intelligence players and established technology companies, the Federal Reserve’s shift in approach, and optimism that the worst of the earnings slump has passed. Nonetheless, there has been a substantial reevaluation of stocks that are of lower quality, cyclical in nature, or belong to small companies, Wilson notes.
The strategist provides advice on when the market will begin to consider the decrease in earnings, with a focus on the equity risk premium (ERP) section of the price-to-earnings (PE) ratio.
The ERP refers to the variance between the predicted earnings return and the return on risk-free Treasurys. If the number is greater, it indicates that investors are receiving greater compensation for investing in stocks.
He stated that the increase in 10-year Treasury yields was responsible for over 100% of the reset on PE in the previous year. In the past, the market has experienced a “moment of recognition” when the forward NTM EPS prediction for S&P 500 goes negative on a year-over-year basis. He believes that the expected reduction in liquidity due to the passage of the debt ceiling could accelerate this process.
If a person who invests in financial markets is interested in what Wilson is offering, they will follow his recommendation to focus on defensive attributes, efficiency in operations, and consistent earnings.
However, in order to end on a more positive note, Wilson adds a glimmer of hope. According to Morgan Stanley, there is expected to be a 23% increase in EPS growth in 2024 and a 10% increase in 2025, as the Fed policy becomes more accommodating in 2024 rather than in 2023. Furthermore, there are additional factors that will help facilitate the next recovery or bull market following the correction.
- A more secure beginning point for the overall financial situation of consumers.
- AI and its diffusion across sectors
- Productivity pickup
- Capex cycle, industrial automation
- A return of positive operating leverage and margin expansion can be observed.
- The development of clean technology and the relocation of crucial infrastructure to domestic locations.
- Housing supply shortage
After the strong surge in the Dow industrials by 700 points following the jobs report on Friday, the stock futures for ES00, YM00, and NQ00 are showing a mixed trend. The 10-year Treasury note has risen by 5 basis points to 3.737%, whereas the dollar (DXY) has strengthened, and both gold (GC00) and silver (SI00) have decreased in value.
The cost of oil, under the symbols CL and BRN00, increased by 2% on Sunday after OPEC decided to reduce oil production by 1 million barrels per day. However, the increase has now decreased to just over 1%.
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