Stocks are set to hit new lows this year, investor survey finds

(Bloomberg) – Investors have little faith in U.S. stocks even after this month’s surge: Most say the market hasn’t bottomed yet due to concerns over corporate earnings.

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That’s the view of around 70% of the 383 respondents to the latest MLIV Pulse survey, with the largest weighting – 35% – saying the lows won’t be reached until the second half of 2023. Less than a quarter believe that stocks have already reached their trough. The results show how shaken investors remain after equities fell last year, with worries growing over the outlook for corporate earnings as the economy slows.

Driving home the changing landscape, nearly half of participants say the key to stocks this week will be quarterly results from Apple Inc., Meta Platforms Inc. and Exxon Mobil Corp., rather than the Reserve’s decision. Federal or whatever President Jerome Powell says on Wednesday. The central bank is widely expected to make a quarter-point hike on Feb. 1, the smallest increase in nearly a year.

“There’s a lot of negativity and uncertainty among investors right now – and for good reason,” said Michael Sheldon, chief investment officer at RDM Financial Group. “It’s a tough time as financial conditions have eased in recent months with rising stock prices, which is not what the Fed wants as it tries to slow the economy to get inflation under control. .”

The S&P 500 index enters this week up 6% in 2023, on pace with its best January since 2019, as signs of slowing inflation and slowing growth have boosted bets that the Fed is about to end its tightening cycle. Yet the most aggressive rate hike effort in decades, combined with a spiral of price and wage increases, has created a difficult environment for companies to boost profits.

About 90% of respondents expect inflation to continue to decline in 2023, but to remain above the Fed’s 2% target. This ties in with doubts about equities, as the question of how long inflation will stay high has made it difficult for investors to position themselves in 2023.

Stock bulls are a solid minority, with just 18% of survey participants saying they plan to increase their exposure to the S&P 500 in the next month. More than half say they will keep their exposure at the same level, while 27% plan to reduce it.

The overarching question as profits rise is the path of growth. The U.S. economy is showing signs of a mild slowdown that the central bank would like to see as it attempts to rein in inflation without triggering a sharp decline.

Forecasters expect US economic activity to contract in the second and third quarters.

“This could be the most anticipated recession the United States has ever seen, if it happens, with some economic indicators already signaling that it is likely,” said Sheldon of RDM Financial Group. “The stock market has likely bottomed, but I wouldn’t be surprised to see further weakness in the spring as investors price in weaker economic data and weaker earnings.”

Bond traders expect the economic situation to be dire enough that the Fed will have to cut spending later this year, with swaps pricing that the US central bank will first raise its key rate to just under 5 % or less by mid-2023. Part of this bet is the expectation that inflation will continue to decline, giving the Fed room to pivot.

“History tells us that nine months after the last rate hike, the Fed tends to lower interest rates,” CFRA chief investment strategist Sam Stovall said in an interview with Bloomberg TV.

This contrasts with the message from a range of Fed officials saying they will raise rates more than 5% and not cut them this year.

More than half of survey participants said they agreed with DoubleLine Capital LP chief investment officer Jeffrey Gundlach that it’s best to watch what the bond market is saying about the trajectory of the Fed, as opposed to signals from central bank officials.

Read more: Gundlach says to listen to the bond market rather than feed on rates

The obvious risk is that it could turn out to be wishful thinking on the part of shareholders who were battered last year as the Fed reacted aggressively to runaway inflation and Treasury yields soared. arrow.

Some investors are warning of a fight against the Fed, especially with corners of the economy — like the labor market — showing resilience in the face of higher borrowing costs. If the Fed wins the chicken game this cycle, the survey pessimists would seem prescient.

“The Treasury market is pretty complacent,” said Tracy Chen, portfolio manager at Brandywine Global Investment Management. “I don’t think the Fed will cut rates this year because they’re probably not happy with the state of the labor market, so there could be another sell-off in Treasuries.

For more market analysis, see the MLIV blog. To subscribe to MLIV Pulse stories, click here.

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