Investors are becoming increasingly pessimistic about the US stock market. But a senior Wall Street insider believes that this is just one reason to start buying.
Larry Adam, Chief Investment Officer of Raymond James' Private Client Division, stated in a report to clients released last Friday that the US stock market, represented by the S&P 500 index, has fallen too much and too quickly, paving the way for a rebound in the market at the end of the year and beyond.
He said, "In July, when the stock market surged above our year-end target of 4400 points, we became more cautious." Fast forward to today, relative to our year-end target (4400 points) and 12 month target (4650 points), the recent decline currently provides 6% and 12% upward space for the S&P 500 index
In the report, Adam listed five reasons why a strong rebound may begin before the end of this year, including investors' increasingly bearish sentiment.
The Federal Reserve's tightening cycle is coming to an end
Although the Federal Reserve and its chairman, Jerome Powell, have been keeping the door open for further interest rate hikes after raising borrowing costs at the fastest pace since the 1980s, Adam said he suspects that the Fed's tightening cycle may have ended after the last rate hike in July.
Powell has admitted that in his view, investors are demanding higher term premiums, which has driven up long-term bond yields, which may have done some work for the Federal Reserve.
Although the US gross domestic product (GDP) growth rate reached a staggering 4.9% in the third quarter, this data depicts past performance and is unlikely to replicate. Meanwhile, the latest personal consumption expenditure (PCE) price data shows that core inflation continued to decelerate in the third quarter.
Adam represents: This should allow the Federal Reserve to pause for a while at next week's policy meeting. Given that we expect economic growth to slow down and the job market to further cool as we enter the final months of this year, the Fed's work may have been completed. If our view is correct, this should be a good omen for the stock market, as the S&P 500 index typically rises 14% in the 12 months after the Fed's last rate hike
After the two-day Federal Reserve's November policy meeting, investors will hear Powell's speech on Wednesday, but few expect the Fed to raise interest rates.
Lowering interest rates can provide support for the stock market
The rise in the yield of US treasury bond bonds may be the biggest trouble for the stock market in the near future.
However, if Raymond James, Bill Ackman and other Wall Street people who have seen signs of economic activity decline are correct, the yield of 10-year US treasury bond may decline. This will be a bullish signal for the stock market.
For investors who hope to survive the economic downturn by locking in the highest interest rate in more than 15 years, even if a large number of new US treasury bond are issued, it may not be enough to meet the demand.
Adam said, "Yes, supply and demand dynamics have been pushing up interest rates recently, but macroeconomic factors such as weak economic growth and sustained inflation should drive interest rates down significantly in the coming months
The market is not buying into strong performance
The long profit recession of American companies is expected to end in the third quarter. According to FactSet's data, after three consecutive quarters of year-on-year contraction, it is expected that the profits of S&P 500 index companies in the recent quarter will increase by about 2% compared to the same period last year.
But the biggest news of this financial reporting season is that the stock prices of technology companies with huge market capitalization, such as Alphabet (GOOG), have suffered a heavy blow after releasing their financial reports.
Adam said, "For example, despite the announcement of a 44% year-on-year increase in mixed earnings per share, which exceeded expectations by a total of 13%, MAGMAN (the main driving force of positive market returns so far this year) overall fell 4% this week and is currently 10% below its recent high
What Adam Says; MAGMAN" This includes Microsoft Corp. (MSFT), Amazon. com (AMZN), Alphabet (GOOGL), and Meta Platforms (META), as well as Apple (AAPL) and Nvidia Corp. (NVDA). Although these two companies have not yet released financial reports, they are expected to achieve strong year-on-year growth based on average earnings per share expectations.
Seasonal trends seem favorable
On average, September was the month with the worst return on the S&P 500 index. After the market typically bottoms out in mid October, the situation tends to improve, and the rebound typically persists in November and December.
Adam said that during 2023 and 2022, the stock market has been closely following these seasonal patterns. If this situation continues, it will be a good omen for the stock market.
He said, "Fortunately for investors, we are about to enter the two strongest months of the year, with the S&P 500 index rising an average of 1.5% and 1.2% in November and December, respectively. Therefore, seasonal trends are expected to turn into favorable situations
Bearish sentiment is often a bullish indicator
Indicators such as the American Association of Independent Investors survey that measure investor sentiment are reliable reverse indicators. When bullish sentiment becomes excessive, there is usually a pullback (as was the case this summer). This dynamic also has a reverse effect.
Adam said, "This week's bearish sentiment (measured by the AAII investor survey) has risen to a five month high, with technical indicators such as RSI reflecting that the S&P 500 index has fallen into oversold territory（