- US stocks have rallied in recent months, giving investors hope that the market has bottomed.
- But Wall Street strategists have warned not to try timing the market, with further volatility ahead.
- The bear market could drag on until the Federal Reserve stops hiking interest rates, one warned.
Bullish investors have started believing the US stock markets are turning around, after a downbeat first half of the year.
Optimists such as Fundstrat’s Tom Lee have argued that prices for equities have bottomed out, and say the summer rally on the major US benchmarks is a flashing sign they’ll hit all-time-highs before the end of 2022.
The S&P 500 is up about 17% and the tech-heavy Nasdaq has gained over 20% over the past two months, as of early Friday. Traders have found cause for cheer in the Federal Reserve’s pledge to be data-dependent on interest-rate hikes and in a lower-than-expected July inflation print, which have eased worries about recession.
But Wall Street’s biggest names aren’t buying it. Big bank analysts have argued that stocks’ current rebound is just a classic bear market rally — when equities rise sharply but just for a short time, before resuming a long-term decline.
“Stocks are still not inexpensive, despite the bear market,” Bank of America’s Savita Subramanian, an equity and quant strategist, said in a recent research note.
“In fact, they are more expensive after the S&P 500’s 17% rally from its June low, driven by a drop in the cost of equity.”
This is not the right moment for investors to try to time the bottom, and disappointing economic data could push stocks lower, according to analysts like Subramanian and UBS’ Jason Draho.
“Becoming more optimistic in the current highly uncertain environment does make the markets more vulnerable to negative news,” Draho, the head of Americas asset allocations at the Swiss bank, said.
Wall Street’s base case remains stocks won’t stage a true revival until the Fed pivots and starts cutting interest rates. The US central bank hiked rates by 75 basis points in June and July to try to tame inflation, which is running close to a four-decade high.
Morgan Stanley’s Mike Wilson has cautioned investors not to bet on a rate-hike pause any time soon. The bank’s CIO noted that July’s strong labor market report — which showed the US adding 528,000 jobs — would give the Fed scope to continue tightening aggressively.
“While inflation appears to be peaking, it’s not likely to come off at a pace fast enough to spur the type of sustained Fed pause the equity market is already discounting,” Wilson said in a recent research note.
Bank of America said this week that it expects rate hikes to continue until February 2023, with nominal interest rates hitting 4%. Meanwhile, Goldman Sachs said a Fed pause would likely only happen at the end of 2022.
While it’s tempting to dive into equity markets, the consensus on Wall Street is that investors should be biding their time, rather than buying indiscriminately.
“The message from us for the next several months remains,” Wilson said. “Risk/reward is unattractive, and this bear market remains incomplete.”