Fed’s pivot forces sharemarket sceptics to become believers
The Federal Reserve’s dovish policy pivot is cornering even the most steadfast Wall Street bears into changing their tune on the US sharemarket.
Morgan Stanley’s Mike Wilson, who’s been one of the biggest pessimists among sell-side strategists, said that the central bank’s shift last week was “a bullish outcome” for shares. Piper Sandler’s Michael Kantrowitz – who held the most glum S&P 500 Index outlook this year – issued a mea culpa and now says the rally can continue, and the breadth of the advance is likely to improve.
Federal Reserve Jerome Powell’s dovish pivot on rate cuts has turned Wall Street’s biggest sceptics more positive on stocks. Bloomberg
The admissions from these usually gloomy forecasters mark a turning point after they advised clients to stay cautious on US stocks this year – even as the market surged toward double-digit gains that have left major indexes at or near record highs.
Heading into 2023, prognosticators had warned that higher rates would tip the world’s largest economy into recession and erode corporate earnings, spurring a sell-off in equities. Instead, the labour market, consumers and US firms have been resilient, propelling the S&P 500 to a roughly 24 per cent advance.
Some strategists still dug in their heels, saying that the lagged impact of elevated borrowing costs would eventually deliver a reality check to investors. After Fed officials signalled last week that their interest rate hiking campaign was likely over and projected cuts next year, it’s made it harder to stick to those warnings.
“I was wrong this year on absolute returns for equities by a lot,” Mr Kantrowitz wrote in a note to clients as he acknowledged that a Fed pivot had clear bullish historical precedence.
“I’m trying to remain open-minded, stay with history and my framework, and be willing to swallow my ego and not remain stubborn.”
After broadly getting it wrong this year, Wall Street strategists have gotten more optimistic on equities heading into 2024. Firms including Bank of America, Deutsche Bank, and BMO Capital Markets are among those predicting the S&P 500 will hit or top 5000.
Still, the consensus view has remained conservative, with the average call of just above 4800 for next year implying a meagre gain of around 1 per cent from here.
New targets
Now some firms are going back to the drawing board. Goldman Sachs Group increased its year-end S&P 500 target one month after setting it, with strategist David Kostin seeing the gauge rise to 5100 points by the end of next year, almost 9 per cent above the 4700 level he predicted in mid-November.
But while Morgan Stanley’s Mr Wilson called the Fed’s pivot “welcome news to equity markets”, he hasn’t done a complete about-face. He left his S&P 500 target at 4500 for next year, implying a 5 per cent drop from Monday’s close.
“This is a bullish outcome for stocks because it means the odds of a soft landing outcome have gone up if the Fed is going to start focusing more on sustaining growth rather than worrying so much about getting inflation all the way down to its 2 per cent target,” Mr Wilson said.
“That’s not to say this dovish shift doesn’t increase the risk of inflation re-accelerating down the line.”
On the bond market, the epic slide in Treasury yields last week from the Fed’s pivot also forced many pundits to jettison days-old forecasts for 2024, but dissent still lingers between bulls and bears.
Bond-market projections for next year that looked pessimistic when they were published in November became untenable as yields slumped. Some already upbeat calls were also completely overtaken by events.
Yet even while many were forced back to the drawing board, major banks are still at odds. TD Securities is among the most bullish on bonds, while Bank of America and Barclays are some of the most sceptical.
The median forecast of strategists at the world’s biggest financial institutions is now for the 10-year US Treasury yield, a benchmark for multiple markets, to fall to 3.98 per cent. That’s hardly far from its level of 3.93 per cent as of Monday’s close, but markedly lower than its yield before the Fed’s pivot: 4.20 per cent – itself down from a 2023 high above 5 per cent.
At the low end, TD Securities thinks the 10-year rate has scope to slump to 3 per cent in a year from now, following 200 basis points of Fed rate cuts beginning in May. Goldman and Barclays, while capitulating on their views that rate cuts were unlikely before the fourth quarter of next year, forecast yields to end 2024 at 4 per cent and 4.35 per cent, respectively.
With Elisabeth Stanton
Bloomberg
Bloomberg
Introducing your Newsfeed
Follow the topics, people and companies that matter to you.
Find out moreRead More
Latest In Equity markets
Fetching latest articles