S&P 500 Rally in Q4 ‘More Likely Than Not’ Despite Headwinds - Morgan Stanley
A rally in the S&P 500 in the fourth quarter of 2023 “is more likely than not”, Morgan Stanley’s Michael Wilson said in a note.
Wilson and other strategists said a majority of investors believed in a potential rally if current levels hold in the short run, despite lingering concerns around higher interest rates and slowing economic growth.
“Many are still leaning more long than they would like, to reduce the probability of missing out in a year in which narrow megacap strength has driven benchmarks,” they said, even as the confidence level may have waned a bit in the past week.
Morgan Stanley maintains its 3,900 year-end price target for the S&P 500 and believes the best way to position is a barbell of defensive growth stocks that have stable earnings, and late-cycle cyclical stocks such as energy.
Wilson, one of the most bearish voices of Wall Street, said the positive sentiment in the market was contingent on current stock prices holding in the short term.
“If it does not, we could see positioning quickly shift to locking in profits and/or relative performance into year end,” said Wilson, Morgan Stanley’s chief U.S. equity strategist.
The S&P 500 has rallied about 13% this year, boosted by the AI euphoria and expectations that the U.S. central bank will not raise interest rates further, but recent economic data and Fedspeak have turned the sentiment in the last one month.
Stocks came under selling pressure last week as investors rushed to Treasuries after a surprise attack by militant group Hamas against Israel, but S&P 500 still managed to eke out some gains.
“The fact that stocks rallied early in the week emboldened the view that equity markets could withstand another exogenous shock,” Wilson said.
The stock was the top percentage gainer on the benchmark S&P 500 in early trading, outperforming both the broader markets and the financial sector.
“Discover Bank has been taking significant steps to strengthen the organization’s compliance management system and address the other issues identified in the consent order,” the lender said in a filing with the U.S. Securities and Exchange Commission on Friday.
In late July, Discover revealed it had received a proposed consent order from the FDIC in connection with consumer compliance.
At the time, the bank’s shares tanked after it also disclosed a regulatory review over some incorrectly classified credit card accounts from around mid-2007 unrelated to the FDIC consent order.
The company then decided to pause share repurchases as well.
As the regulatory review on the misclassification is ongoing, additional enforcement actions or other supervisory activity from the FDIC and other regulators remain possible, Discover said in filing on Friday.
Strong upcoming earnings results could reverse the decline in mega-cap technology and growth stocks, which have been hammered by the rise in Treasury yields and are trading at their cheapest levels in six years by one measure, according to Goldman Sachs strategists.
The so-called Magnificent Seven group of megacap stocks -Apple, Microsoft, Amazon.com, Alphabet, Nvidia, Tesla, and Meta Platforms - have fallen 7% over the last two months, compared with a 3% decline in the broad S&P 500, as Treasury yields jumped more than 60 basis points to 16-year highs.
Those declines have pushed mega-cap forward price-to-earnings ratios down by a collective 20% over the last two months, leaving them trading at their largest discount to the market based on long-term growth since January 2017, Goldman Sachs said in a note dated Oct. 1. At the same time, the group is expected to post sales growth of 11% in the third quarter, compared with a 1% improvement for the S&P 500, the firm noted.
The mega caps in aggregate have beaten consensus sales growth expectations 81% of the time and have outperformed in two-thirds of earnings seasons since the fourth quarter of 2016, Goldman’s strategists said.
“The divergence between falling valuations and improving fundamentals represents an opportunity for investors,” they wrote.
The bullish call on tech stocks comes as investor sentiment for equities overall has flatlined, which historically has been a contrarian indicator of more gains ahead, Savita Subramanian, equity and quant strategist at BofA Global Research, wrote in a note Monday.
The average recommended allocation to equities in balanced funds remained unchanged at 53% in September, below the benchmark of 60%, Subramanian noted. Falling sentiment has historically been a signal of broad gains over the following 12 months, she noted.