The equity market is due for a cooldown, according to several strategists, who are telling clients to begin positioning themselves defensively in preparation for a slow-growth earnings environment next year. “We think the ‘too high, too fast’ rally is ripe for a breather” in the first quarter of next year, Barclays’ head of U.S. equity strategy Venu Krishna wrote in a note Tuesday. A seven-week long advance of some 14.6% in the S & P 500 is greater than any seven weeks of consecutive gains over the last two decades, Krishna pointed out. Investors haven’t taken their foot off the gas ever since Treasury yields peaked in late October. The latest push higher, which sent the Dow Jones Industrial Average above 37,000 for the first time , came in response to Federal Reserve officials last week again leaving rates unchanged and signaling that several rate cuts are in store for 2024. The S & P 500 has rallied almost 24% this year, but is up 11% in the fourth quarter alone. After closing Tuesday at 4,768, the benchmark index used by most professional investors to measure their performance is now less than 1% from surpassing its record close set in January of 2022. On average, market observers expect the S & P 500 to end next year at 4,881, according to the consensus target compiled in a CNBC Strategist Survey released Monday — equal to just a 2.4% advance over the next 12 months. Barclays’ analysis of prior interest rate cuts indicates that they’ve proven a reliable buying signal over the past 40 years, according to Krishna. During such spans, technology and defensive sectors such as healthcare and consumer staples, as well as large-cap names rather than small-cap stocks, have given the strongest returns. “We expect Big Tech to be the primary driver of [S & P 500] earnings growth in FY24, underpinned by secular growth drivers, but remain skeptical about the expected strong recovery in earnings for the rest of SPX, especially with most sectors facing margin pressures,” Krishna said. “This leaves us skeptical about the longevity of the ‘broadening’ trade that is currently in vogue.” Krishna was referring to stellar returns in the fourth quarter from this year’s laggards. The SPDR S & P Regional Banking ETF , for example, is up 24% this quarter, but still down 12% for the year. The S & P 500 Real Estate sector is ahead 16% in the quarter, beating the S & P 500, but underperforming for the full year, rising just 7%, less than one-third of the gain for the entire market. RBC Capital Market’s head of U.S. equity strategy Lori Calvasina similarly argues that although she remains constructive on the domestic equity market in the year ahead, the risk of a pullback has risen. She says inflows of new money in to U.S. equity funds may start to stall and the S & P 500 looks “highly expensive” compared to Europe. According to Calvasina, industrials are the most overvalued sector in the S & P 500, while energy and communication services offer the most attractive valuations. .GSPHC YTD mountain S & P Health Care sector performance this year. JPMorgan is advocating a defensive strategy, noting that the price-to-earnings multiples on stocks appear especially expensive. “We expect both inflation data and economic demand to soften in 2024,” chief market strategist Marko Kolanovic wrote on Monday, pointing to headwinds standing in the way of further gains, such as fading consumer spending, geopolitical tensions and expensive valuations for risk assets. “Even in an optimistic scenario, we believe upside is limited for risky assets, favoring cash and bonds over equities from a risk-reward standpoint.” JPMorgan maintains a defensive allocation in its model portfolio heading into next year, and recently added a weighting in Japanese equities given their cheap valuations and strong balance sheets. Looking ahead, Kolanovic also expects a tough year ahead for corporate profits. “After a period of record pricing power, the recent disinflationary trend should become a major headwind for corporate margins amidst sticky and lagging wage trends,” Kolanovic said. “We expect lower sequential revenue growth, no margin expansion, and lower [stock] buyback executions.”
Sumber: www.cnbc.com
