By Barbara Kollmeyer
“The S&P 500 is still ‘buy the dip’ for the next six months.”
That’s the view of Manish Kabra, head of U.S. equity strategy and multi-asset strategist at Societe Generale, who laid out to clients in a note 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 profits 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 from others on Wall Street, such as Morgan Stanley’s Mike Wilson, who has been doubting earnings staying power 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 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 onto a 10% gain so far for 2023, while the yield on the 10-year Treasury note hovered at 4.71% on Thursday, but well up from 3.8% at the start of the year.
For the third quarter, S&P 500 companies are expected to report a year-over-year earnings fall 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.
Societe Generale 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.”
The strategist 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,” said 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 4-5%, S&P 500 = 4,050-4,750.Mild recession (Societe Generale’s 2024 base case): U.S. 10-year yields ranging between 3-3.5%, S&P 500 = 3,800Hard landing (recession): U.S. 10-year yields ranging between 2.5-3%, S&P 500 = 3,100-3,500.Irrational exuberance (no landing and risk of a global event triggers Fed easing): an ‘exuberance’ value for the S&P 500 in this scenario would be new highs.
To be sure, Kabra’s view may be slightly more sanguine than 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.
Read: ‘One percenter depression’ and giant sector rotation: How a hedge fund manager sees bond crisis playing out.
-Barbara Kollmeyer
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10-05-23 1000ET
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