Two of Wall Street’s top strategists are at odds about the outlook for US stocks following a three-week run of declines as debate rages over whether the economy can avoid a recession.
(Bloomberg) — Two of Wall Street’s top strategists are at odds about the outlook for US stocks following a three-week run of declines as debate rages over whether the economy can avoid a recession.
While Morgan Stanley’s Michael Wilson — a stalwart equity bear — says sentiment is likely to weaken further if investors are starting to “question the sustainability of the economic resiliency,” his counterpart at Goldman Sachs Group Inc., David Kostin, says there’s room for investors to further increase exposure if the economy stays on course for a soft landing.
Goldman’s equity sentiment indicator — which measures nine positioning metrics including the exposure of hedge funds, demand by foreign investors and fund flows — dropped last week after climbing since December. In a note, Kostin said he expects the decline to be “short-lived” and that hedge funds, mutual funds and retail traders would all increase bullish bets if the “market environment continues to improve.”
Wilson, on the other hand, said stock investors had now become too optimistic about a soft landing. He said cooling inflation had crimped Corporate America’s ability to raise prices, and that would stand to get worse through the year if consumer demand fades.
Moreover, “it’s fair to say that we just don’t know the answer to the question, yet, in terms of a soft landing outcome and an associated rebound in pricing power,” Wilson wrote in a note. “We believe the ‘risk off’ complexion of markets will remain with us possibly well into the fall/winter should fundamentals deteriorate as we expect and the market does not.”
Wilson correctly predicted the slump in stocks last year, and has stuck to his bearish view this year even as the market rallied.
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US stocks posted their third weekly decline in a row on Friday — the longest streak since February — as signs of resilience in the economy bolstered wagers the Federal Reserve would keep interest rates higher for longer. The next clue on the central bank’s policy outlook will come later this week when Chair Jerome Powell addresses the Kansas City Fed’s annual symposium in Jackson Hole.
HSBC Holdings Plc strategist Max Kettner also said it’s not yet time to increase exposure to risk assets given the risks of a broad-based selloff from bond supply and the Jackson Hole symposium.
“We wouldn’t jump right back in just yet,” Kettner wrote in a note, adding that he would use any subsequent declines to buy the dip, particularly in US stocks.
(Updates with comments from HSBC’s Max Kettner in eighth and ninth paragraphs)
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