A rally for China stocks, following a few tweaks in the government’s unpopular and to some, ineffective, zero COVID policies, doesn’t seem to be doing a ton for Wall Street on Tuesday.
Futures are a little higher, but perhaps overshadowing gains are pivot hopes on ice, after New York Fed President James Bullard said markets have underestimated how aggressive the central bank needs to be to get inflation under control.
Read: It’s wishful thinking that stocks will soar before the Fed pivots to lower rates
Guessing Fed moves will be among the many hurdles facing investors in 2023, according to crystal-ball gazing we’ve seen thus far. Deutsche Bank said Monday that a U.S. recession next year will pummel stocks, though they see a recovery likely by end-2023.
But maybe don’t get too carried away by the word recovery. Goldman sees a “hope” phase kicking in next year, but the S&P 500 finishing around 4,000, while Morgan Stanley expects a “terrific” first quarter buying opportunity, but a finish at 3,900. Both end goal posts are not far off where we are currently.
Our call of the day comes from Bank of America, which tosses its own forecasts into the ring, as they mix worries with encouragement about keeping an eye on the long-term prize.
“Focus on the marathon, not the sprint,” said a team led by Savita Subramanian, head of U.S. equity & quantitative strategy. Their 2023-end target is also 4,000, with a bear case of 3,000, as they say near-term pain from company earnings should be expected.
BofA’s S&P 500 earnings per share forecast is $200, a number 15% below other Wall Street estimates. And returns ahead of earnings revision troughs have often been “deeply negative,” cautions Subramanian.
“But the best phase is that which follows — low but rising earnings revisions ratios. The market typically bottoms six months before the end of a recession, so buy in 1H based on our economists forecast of the recession ending by 3Q 2023,” she said. Their bull case for the S&P 500 is 4,600, based on the contrarian signal of a very bearish Wall Street.
What to own? While “2022 was all about the Fed, 2023 is about the real economy. Own quality, income, reshoring, green and brown [renewables and fossil fuels], small-caps,” is Bofa’s key advice. Cyclical factors, such as slower growth, are part of the reason investors need to seek out quality stocks.
She advises focusing on income and defense, saying if bonds do well, utilities will follow, and have lifted their view on the sector to overweight. Healthcare was cut to marketweight on risk of crowding by investors, while communication services “appears to be a value trap.” They cut tech to underweight owing to cyclicality and de-globalization risks.
The key risks ahead for BofA lie in that old cliché “it is different this time.” They see liquidity risk in “odd places” — the S&P 500 (“the most crowded ticker in the world”) and Treasury bonds, unprecedented public sector debt and polarized polities ahead, along with sticky, high inflation. The silver lining to that debt is that companies look far better capitalized than in prior recessions.
They are also worried about a “wealth effect on steroids,” noting that the $22 trillion lost in equities, bonds, cryptocurrency and real estate this year would equal a $700 billion hit to consumption, “which represents about 4% of total current consumption, plus or minus.”
BofA lays out its recession worries, clearly: “Since COVID idiosyncratic risk in the market has dropped, and average pair-wise stock correlations surged in 2022. The biggest rate shock in history, the most aggressive hiking cycle, the biggest inflationary pressure in 40+ years, rising recession fears, wartime and ongoing geopolitical risks, urgency building around carbon emission reduction suggest macro will loom large in 2023,” they said.
The bright side? BofA wants investors to look past the near term and into what could be a much brighter future ahead. “Our 10-year valuation model suggests that even if you buy today, you will enjoy [roughly] 5% price returns…pushing the S&P 500 to 6,000 by 2,032,” said Subramanian and the team.
are slightly higher, with bond yields
softer and oil prices
rising. The dollar
is lower and gold
is higher. Asia markets rebounded as China protests eased, with Hong Kong’s Hang Seng Index
Read: Energy stocks look ‘especially vulnerable’ to crude-oil selloff
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Protests died down across China overnight, with heavy police presence and some university students sent home. Markets got a lift after a meeting by China’s National Health Commission announced plans to get more elderly vaccinated and shorten time between boosters.
Home prices from S&P Case-Shiller and the Federal Housing Finance Agency are due at 9 a.m., followed by the consumer confidence index at 10 a.m. Eastern.
There’s a smattering of deal news. Royal Bank of Canada
will acquire HSBC Canada
for C$13.5 billion ($10.1 billion) in cash. Apollo Endosurgery shares
are surging 61% in premarket on news of a $615 million deal to buy the company by Boston Scientific
A record-breaking $11 billion was spent on Cyber Monday, said Adobe
as shoppers snapped up bargains.
Iran reportedly threatened the families of its national team players ahead of the important World Cup match later against the U.S.
Read: Qatar World Cup: How much prize money is at stake?
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