(Bloomberg) — Investors have little confidence in US stocks even after this month’s surge, fearing weak corporate earnings could drag them back down.
Any weakness in outlook or quarterly results from Apple Inc., Meta Platforms Inc. and Exxon Mobil Corp. could outweigh relief over a downshift by the Federal Reserve or anything Chair Jerome Powell says Wednesday, according to respondents in the latest MLIV Pulse survey. The central bank is widely expected to deliver a quarter-point hike on Feb. 1, the smallest increase in almost a year.
Roughly 70% of the 383 respondents in the survey say the stock market has yet to hit the bottom. The biggest weighting — 35% — says the lows won’t be in until the second half of 2023.
Those responses show how shaken investors remain after last year’s pummeling in equities, with worries building over the outlook for company profits as the economy slows.
“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 difficult time because financial conditions have loosened in recent months with stock prices rising, which isn’t what the Fed wants since it’s trying to slow the economy to tame inflation.”
The S&P 500 Index enters this week up 6% in 2023, on pace for its best January since 2019, as signs of ebbing inflation and cooling growth have spurred bets that the Fed is close to ending its tightening cycle. Still, the most aggressive rate-hiking effort in decades, combined with a spiral of price and wage increases, has created a challenging environment for corporations to grow profits.
Roughly 90% of survey respondents expect inflation will continue to fall in 2023, but remain above the Fed’s 2% target. That dovetails with doubts about stocks as the question of how long inflation will remain elevated has made it tricky for investors to position themselves in 2023.
Stock bulls are solidly in the minority, with only 18% of survey participants saying they expect to increase their exposure to the S&P 500 in the next month. Over half say they will keep their exposure the same, while some 27% anticipate decreasing it.
The overarching question is the trajectory of growth. The US economy is showing signs of a mild slowdown that the central bank would want to see as it attempts to tame inflation without triggering a sharp downturn.
Forecasters expect US economic activity to contract in the second and third quarter.
“This could be the most anticipated recession the US has ever had, if it does occur, with some economic indicators already signaling that it’s likely,” Sheldon of RDM Financial Group said. “The stock market has probably bottomed, but I wouldn’t be surprised to see additional weakness in the spring as investors incorporate weaker economic data and lower profits.”
Bond traders expect the economic picture to be dire enough that the Fed will have to cut later this year, with swaps pricing that the US central bank first lifts its policy rate to just under 5% or less by mid-2023. Part of that wager is the expectation that inflation will keep sliding, giving the Fed room to pivot.
“History tells us, nine months after the last rate hike, the Fed tends to cut interest rates,” Sam Stovall, CFRA Chief Investment Strategist, said in a Bloomberg TV interview.
That’s in contrast to the message from an array of Fed officials saying they’ll hike rates over 5% and not lower them this year.
More than half of survey participants said they agree with DoubleLine Capital LP Chief Investment Officer Jeffrey Gundlach that it’s best to watch what the bond market is saying about the Fed’s path — as opposed to signals from central bank officials.
The obvious risk is that it could turn out to be wishful thinking on the part of shareholders who got pummeled last year as the Fed responded aggressively to rampant inflation and Treasury yields soared.
Some investors warn against fighting the Fed, especially with corners of the economy — like the labor market — showing resilience in the face of steeper borrowing costs. If the Fed wins this cycle’s game of chicken, the survey’s pessimists would look prescient.
“The Treasury market is quite complacent,” said Tracy Chen, a portfolio manager at Brandywine Global Investment Management. “I don’t think the Fed will be cutting rates this year with them likely not happy with the job-market situation. So there could be another selloff in Treasuries.”
Markets don’t appear to be pricing in any risk related to the US debt ceiling, as more than 40% of respondents expect borrowing-limit crisis will be avoided. President Joe Biden agreed to meet House Speaker Kevin McCarthy on Feb. 1 to discuss the borrowing cap.
For more markets analysis, see the MLIV blog. This week, the MLIV Pulse survey focuses on tech and AI. Do you think in three years, the AI will be able to do your job? Share your views here.
–With assistance from Tomoko Yamazaki.