After a strong comeback from the COVID-related economic crisis, the U.S. stock market is in a lull, and Wall Street’s biggest banks are divided over whether that presents an opportunity or warning to investors.
Goldman Sachs and JPMorgan Chase released notes this week telling investors to “buy the dip,” while analysts at Morgan Stanley and Bank of America sounded warnings. The divide centers on consumer sentiment and the willingness of the U.S. Federal Reserve’s willingness to step in.
Goldman, while recognizing concerns over stagflation, is still bullish on stocks.
“Despite near-term uncertainty, we expect the equity market will continue to rally as investors gain confidence that the current pace of inflation is transitory,” Goldman strategists led by David J. Kostin wrote in a note to clients.
Strategists at JPMorgan Chase led by Mislav Matejka concurred, writing that stagflation fears will start to fade.
Jitters over surging prices and concerns that the post-pandemic recovery is now past its peak dragged the S&P 500 Index 5% below its September record last week, after almost a year without a correction of this magnitude. Persistent supply bottlenecks, along with a slowdown in China, have raised doubts about whether stock valuations can be stretched any further.
A Deutsche Bank AG survey of market professionals suggested that the majority of them see at least another 5% pullback in equities by the end of the year. There’s “a fairly strong consensus” that some kind of stagflation is more likely than not, according to the survey results published Monday.
Goldman and JPMorgan resoundingly disagree.
“We believe this dip will prove a good buying opportunity, as 5% pullbacks usually have in the past,” Goldman strategists said.
“We finally got some weakness after 330 days of no greater than 5%+ pullback, but we don’t expect it to last, and advise to buy into the dip,” JPMorgan strategists wrote.
Bullish calls from JPMorgan and Goldman add to an increasing number of voices saying that the current spike in consumer prices, largely fueled by a jump in energy costs, will be temporary.
“The surge in energy prices will slow growth, but in our view is not sufficient to cause recession,” UBS Global Wealth Management strategists led by Mark Haefele wrote in a note on Monday. “Energy prices are likely to stabilize or moderate through next year.”
They also added that central banks will likely look through higher energy prices as opposed to overreacting.
That runs counter to the thinking at some other banks.
Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, said there’s been an “uncharacteristically” wide divergence between how consumers and investors feel about the economy after the surge in delta virus cases this summer.
“We believe that corporate profit forecasts are vulnerable, especially if consumer sentiment translates into less spending and more savings,” she wrote in a note to clients.
Consumers appear to be weighed down by the slow recovery, inflation worries and political wrangling in Washington, while investors are more focused on positive earnings revisions and subtle changes in the Federal Reserve’s policies, Shalett said.
“Critically, the Fed and investors have embraced the view that inflation is transitory — a view not shared by consumers. If consumer sentiment doesn’t quickly improve, it could be a signal of market weakness that would be sparked by disappointing earnings, weaker spending and higher savings rates,” she warned.
Metrics that track consumer expectations for the future show that consumers don’t see their concerns about inflation and the labor market recovery as temporary, she said. If that sentiment translates into real action, in the form of less spending and more savings, that could weigh on corporate profit forecasts, and ultimately weigh on stocks.
Compounding the issue, Bank of America stategists said, the U.S. Federal Reserve may not be so eager to rescue the stock market this time around.
“The Fed may be less willing to so easily deviate from tapering plans and talk the market back up as during the last cycle,” BofA strategists including Riddhi Prasad and Benjamin Bowler said in a note. As reasons for their skepticism they cite equity valuations and returns accelerating to “extremes,” and “increasingly real” risks of inflation overshooting.
“Investor confidence in buying the dip may only keep waning the longer this sideways price action persists,” BofA strategists said. “The market may need a period of bad news to get the Fed back on its side or reach more attractive valuation levels.”
In between the two camps, BlackRock Investment Institute strategists this week reiterated their neutral stance on U.S. equities, saying that risks toward the end of the year, including the expiration of the temporary U.S. debt ceiling increase, could potentially trigger market volatility.
“We are tactically neutral U.S. equities as we see U.S. growth momentum peaking and expect other regions to benefit more from the broadening economic restart,” the strategists, including Wei Li, wrote in a note. “We see a narrowing path for risk assets to push higher and markets more prone to temporary pullbacks.”
