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“The S&P 500 is still ‘buy the dip’ for the next six months.”
That’s the view of Manish Kabra, head U.S. equity and multiasset strategist at Société Générale, who laid out in a note to clients on Thursday how he sees markets proceeding in the near term.
“We expect the profit cycle to improve in the next six months and cyclical data such as the ISM to rise to 55 before the consumer-spending downturn leads to a selloff in U.S. stocks,” said Kabra.
Corporate profit expectations are behind much of that forecast for stocks. “We expect profit growth to accelerate over the next two quarters, hence our S&P 500
SPX
target range of 4,050 to 4,750. A mild recession in the middle of 2024 should lead to a higher risk premium, riving the S&P 500 back to 3,800,” he said.
And Kabra differs with others on Wall Street, such as Morgan Stanley’s Mike Wilson, who has been doubting the staying power of corporate earnings this year.
“The entire move in the major U.S. equity averages this year has been the result of higher valuations,” he recently said. “However, with forward price [to] earnings multiples reaching 20 times on the S&P 500 last month, not only are stocks anticipating higher earnings and growth, but they now require it.”
The S&P 500 is holding on to a 10% gain for 2023, while the yield on the 10-year Treasury note
TY00,
in sharp decline at midweek, hovered at 4.71% on Thursday, well up from 3.8% at the start of the year.
For the third quarter, S&P 500 component companies are expected to report a year-over-year earnings decline of 0.3%, but for the fourth quarter analysts are expecting growth of 8.2%, according to FactSet. Another negative quarter of growth would mark the fourth straight for the S&P 500.
Société Générale’s note argues that the global profit cycle is “still on an upturn, and the signals from earnings per share estimate dispersion (a fundamental volatility signal) are helping credit spreads to not rise substantially despite the negative signals from the lending standards.”
Strategist Kabra also weighed on the No. 1 question on Wall Street right now: “How high is too high for bond yields?”
Read: ‘No magic level’: Yields won’t cool without ‘substantial’ stock selloff, says Barclays
“When will rising yields become a problem leading to a potential default risk? The answer is when the profit/growth cycle turns negative. Currently we see positive signals, with the SG Global Cycle Indicator improving (only driven by the US),
and fundamentals such as EPS estimate dispersion continuing to fall, supporting credit spreads,” wrote Kabra.
He laid out the bank’s best estimate ranges for 10-year yields in a variety of scenarios:
- No recession: U.S. 10-year yields ranging between 4% and 5%, with the S&P 500 between 4,050 and 4,750.
- Mild recession (SocGen’s base case for 2024): U.S. 10-year yields ranging between 3% and 3.5% and the S&P at 3,800
- Hard landing (recession): U.S. 10-year yields ranging between 2.5% and 3% and the S&P between 3,100 and 3,500.
- Irrational exuberance (no landing and risk of a global event triggering Fed easing): an “exuberance” value for the S&P would put the broad benchmark index at new highs.
To be sure, Kabra’s view may be slightly more sanguine than that of his colleague, strategist Albert Edwards, who has warned of a 1987-style event for stock markets if the bond market does not cool off.
“Just like in 1987, any hint of recession now would surely be a devastating blow to equities,” said Edwards on Tuesday.
