(Bloomberg) – Forecasters up and down Wall Street have been caught off guard by how financial markets are performing in the first half of 2023. That seems to have shaken her confidence in the strategy for success for the rest. At the start of the year, a handful of predictions dominated strategists’ full-year outlook. A global recession was imminent. Bonds would outperform stocks as stocks would retest bear market lows. Central banks may soon be able to halt the aggressive rate hikes that have made 2022 a year of market misery. If growth faltered, risky assets would face even more problems. But that pessimistic outlook was dashed as stock prices rose, even as the Federal Reserve continued to raise interest rates in the face of persistently elevated inflation. And what was to be the year of bonds failed: US Treasuries have almost erased their tiny annual gain as yields test new highs and the economy remains surprisingly resilient amid the Fed’s monetary rush. For this reason, financial market fortunetellers have seldom been so divided on where markets are headed next. This is illustrated by predictions of where the S&P 500 will end the year: there is a 50% difference between Fundstrat’s most bullish forecast (which expects a rise of almost 10% to 4,825) and Piper Sandler’s most bearish forecast ( down about 27% to 3225, according to data from Bloomberg.The mid-year gap hasn’t been this wide in two decades.
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Some are now withdrawing their recommendations or postponing the timing of their calls. Strategists at JPMorgan Chase & Co. recently exited a recommended long position in five-year government bonds. Those at the BlackRock Investment Institute, who suggested a foray into investment grade credit earlier in the year, have now taken a neutral view of the sector. At Bank of America Corp. – and elsewhere – the recession once expected for this year has been postponed as growth continues to be stronger than expected. Bespoke co-founder Paul Hickey was among those who weren’t entirely surprised. In January, he offered a contrarian outlook, saying the negative consensus among strategists means risky assets like equities may be poised for a rebound. “Because the consensus was so dovish earlier in the year, the market didn’t need a positive catalyst to start a rally, just a lack of bad news,” he said. “When we’re faced with conflicting messages from the news and the markets, we always rely on the markets.” After the Nasdaq 100 index rose 37% this year, some strategists have adjusted their stock market targets just to accommodate it carry the stock rally — even if they post modest gains or declines for the rest of the year. Goldman Sachs raised its original year-end target for the S&P 500 to 4,500 from 4,000 after the bank downgraded the likelihood of a recession. It closed just below 4,400 on Friday. Bank of America, Barclays, BNY Mellon Investment Management, Citigroup, Morgan Stanley and Wells Fargo Investment Institute, among others, are forecasting to end the year worse than they are now. BlackRock is betting on the AI boom but continues to warn of the dangers plaguing developed markets stocks. But while about a third of the two dozen strategists polled by Bloomberg have already raised their targets and measures of near-term sentiment have improved, large investors remain cautious. A survey of the top 60 wealth managers conducted by HSBC Holdings Plc shows that they have become more gloomy about the long-term outlook, making them even more pessimistic about high-yield bonds and equities and prompting an even greater preference for long-dated government bonds. At the same time, strategists’ average year-end outlook represents a roughly 8% decline in the S&P 500 over the final six months of 2023. That’s the most bearish view for the second half since at least 1999.
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“It’s premature to say that the bearish year-end forecasts are really wrong,” said Steve Sosnick, chief strategist at Interactive Brokers. “Being bullish on equities amid the sharpest rate hikes in a generation and ongoing quantitative tightening defies that logic.” On the contrary, the ongoing pessimism can bode well for risk assets, as it suggests untapped purchasing power that equities could spike higher if it reenters the market and the bears finally give way. This has happened throughout the year as defensively positioned investors have been under pressure to chase profits.
One thing is for sure, while some bears are holding their guns, the handful of bulls from the start of the year are becoming more and more bullish. Fundstrat’s Tom Lee, who already had the highest year-end forecast for the S&P 500, further raised his estimate to 4,825. Meanwhile, Ed Yardeni, founder of his eponymous research company, who called for a soft landing late last year, says the worst may be behind us and the economy may already be picking up speed. “Our ‘rolling recession’ is becoming a ‘rolling expansion,'” Yardeni said. “The pessimists attached great importance to a tightening of monetary policy. They’ve always been waiting for a recession, but like Godot, it just didn’t happen.”
Here’s a sample of what some of the biggest names are telling their clients: Bank of America The bank has revised up its target for US equities, forecasting a later and milder US recession.
Barclays ResearchThe company has abandoned its preference for bonds over equities and sees a milder economic downturn in the US.
BlackRock Investment Institute, the world’s largest wealth manager, just issued a bullish view on AI but remains cautious on developed market stocks.
BNY Mellon Investment Management: The company sees more recession risk and price pressure than previously forecast.
CitiDie Bank keeps a US stocks target pointing to losses in the second half of the year and sees a US recession in 2024.
JPMorganThe Bank is currently forecasting weakness for equities in the second half of the year amid the challenging macro backdrop.
MorganStanley
The bank thinks the US and Europe can avoid a recession but doesn’t expect any gains for US stocks until June 2024.
The Wells Fargo Investment Institute is later postponing its recession forecast and has lowered its target range for US stock returns.
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