U.S. stock market risks turbulent fall, Wall Street analysts warn

After a record bull run for the US stock market this year, many Wall Street analysts are starting to warn investors could experience a bumpy ride in the weeks and months to come.

Analysts from companies such as Morgan Stanley, Citigroup Inc., Deutsche Bank AG, and Bank of America Corp. issued notes this month warning of the current risks in the US stock market. With the S&P 500 having already hit 54 records this year through Thursday – the highest number in this period since 1995 – several analysts said they believe there is a growing possibility of a pullback or, at less, flatter yields.

Behind this cautious outlook, the researchers said, lie a combination of factors, including a euphoric investment sentiment, extended valuations and the anticipation that inflation and supply chain disruptions will weigh on the margins of commodities. companies.

In a note on Wednesday, BofA Securities strategists said they didn’t see much to get excited about, asking, “What good news is there left?” They added: “A lot of optimism is already being taken into account.”

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In the note, the Bank of America team led by Savita Subramanian, responsible for US equities and quantitative strategy, shifted its year-end price target for the S&P 500 price to 4,250, a reduction of 4 .7% from the 4458.58 level at which the benchmark closed on Friday. For 2022, Bank of America has set a price target of 4,600 for the end of the year.

Analysts’ cautious outlook for US stocks contrasts with the so-called TINA currency – or “There Is No Alternative” – which has dominated investor prospects for much of last year. Because the returns of other assets such as bonds have been so low, many investors have justified their continued bullish positioning in equities. The Federal Reserve’s accommodative monetary policy has also provided continued momentum for stocks this year, as has the lure of big returns on investment from a host of companies, ranging from stocks even to beneficiaries of Covid-19.

In their September notes, however, some strategists said they were looking at other parts of the market for future gains. In a note last week, Morgan Stanley strategists wrote they were downgrading their rating on US stocks to “underweight,” saying they preferred stocks in Europe and Japan and viewed cash as more. in addition to attractive to hold.

“We expect an understandable level of eye rolling as we move overweight cash,” Morgan Stanley team, including Andrew Sheets, wrote in the note, adding the caveat that some international stocks and the like. assets are attractive compared to cash. The note continued, “Morgan Stanley strategists expect liquidity to exceed US stocks, government bonds and credit over the next 12 months.”

Parts of Morgan Stanley’s forecast are being implemented at New York Life Investments, the investment arm of New York Life Insurance Co. with more than $ 600 billion in assets under management.

In its investment portfolio, the company is currently overweight international developed equities. Lauren Goodwin, economist and portfolio strategist at New York Life Investments, said there has been more economic growth in Europe and Canada, two areas in which the company has increased its investments.

Nationally, Ms Goodwin says she thinks the best days for parts of the market are probably behind us. Still, she says it’s too early for investors to become totally defensive. She said the investment firm expects some value and small-cap companies to continue to perform well.

“The way we position our portfolios is that we stick to reopening trade but believe that … investors will need to invest more time and effort to find quality companies that will continue to see their profits increase,” he said. Mrs Goodwin said.

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There have already been signs of weakness in the US stock market in recent trading sessions. All three major indices fell last week and are currently down for the month. The trend, if continued, would mark the first monthly loss for the S&P 500 since January. In general, September tends to be a historically low time for the US stock market. This year in particular, investors enter the turbulent period with uncertainty.

Over the coming week, investors will analyze the latest inflation data from the Labor Department’s Consumer Price Index, due Tuesday. They will also be on the lookout for any further comment from central bankers on their take on when the Fed will withdraw its asset purchase stimulus program. Some investors and analysts see tightening monetary policy as a potential risk for stocks.

In a note last week, analysts at Citi Research said they saw another risk to the market: fears that the current bullish positioning could amplify a market sell-off. Such long positions in the S&P 500 are 10 times more numerous than short positions at 1, wrote a team of analysts including Chris Montagu, adding that about half of the long positions would be in loss if the index of benchmark fell below 4435, to less than 1% on Friday. closing level.

“This means that a small correction could be amplified by a long forced liquidation pushing the market even lower,” the note from Citi said.

This month’s alarm bells from analysts are not the first to be sounded during the current bull market. Throughout 2021, many market watchers on Wall Street have raised concerns about signs of excess in the market, and investors have periodically braced for a pullback.

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Still, US stocks have largely continued to rise, even amid periodic declines. On Friday, the S&P 500 fell for a fifth straight session, its longest losing streak since February, to post a loss of 1.7% for the week.

The last time the benchmark suffered a weekly loss of this size was the week ended June 18, when it fell 1.9% for the week. The index then rose 4.9% over the next three weeks.

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