S&P 500 Index The rebound of nearly 5% since July has triggered a debate on Wall Street about the long and short of the stock market. Morgan Stanley (Morgan Stanley) said that the current rebound is actually an illusion. U.S. stocks may have hit a bottom.
Lisa Shalett, chief investment officer of Morgan Stanley’s wealth management department, said on Monday (25th) that the stock market rebounded because investors expected that inflation had peaked and the job market had begun to cool, which would give the Fed room to cut interest rates early next year. The direction is right, but the pricing is not yet ripe.”
Shalett pointed out that the Fed has never stopped tightening before a key inflation measure fell below its benchmark rate in the past. If the Fed raises interest rates by 3 yards (75 basis points) this week and raises the benchmark interest rate to 2.5%, it is still far below the annual increase in the core personal consumption expenditures (PCE) price index, which is the inflation indicator used by the Fed’s decision-making preference. The rate was 4.7%, with June data due this Friday.
Not only is the Fed tightening cycle more protracted than bulls expected, but bulls are too optimistic about second-quarter earnings, even as valuations slump, she said.
“In our view, this bear market rally is full of false fantasies, and we are concerned that investors are thinking the Fed’s accelerated rate hikes are nearing a peak and moving toward ending the tightening cycle,” Shalett said.
Markets head into the most important week of the summer, with the Fed gearing up for another big rate hike in July and tech giants such as Microsoft, Apple, Alphabet, Amazon and Meta reporting earnings.S&P 500 IndexIt closed up 0.13 percent at 3,966.84 on Monday.
The bulls on U.S. stocks appear to be in the minority on Wall Street. Managers have slashed their equity positions to lows not seen since the 2008 financial tsunami, according to a Bank of America survey this month, apparently not confident in the current stock market rally. In addition, 72% of respondents to a Deutsche Bank survey at the end of June believed the S&P 500 would first fall to 3,300 rather than rebound to 4,500.
Yardeni defies public opinion
However, Edward Yardeni, president of Yardeni Research, advocated on the same day that the S&P 500 fell to 3,666.77 in June, which may be the bottom of the stock market crash in 2022. He had predicted the stock market bottom in March 2009, when the S&P 500 had fallen to an intraday low of 666.79.
“Predicting a bottom is never easy, but I’m going to give it a shot,” Yardeni said. “The key will be earnings season, and so far, corporate earnings have been pretty good and haven’t really hit the stock market, which is doing pretty well.”
Yardeni said U.S. second-quarter gross domestic product (GDP), released on Thursday, may have contracted for two consecutive quarters, but he saw it as a “mid-cycle slowdown” rather than a “hard landing.”