Our latest Big Money poll of professional investors finds more than half bullish on equities. Inflation is the biggest risk. By Paul R. La Monica
The stock market hit a speed bump in April after a solid first quarter, as stubborn inflation led investors to readjust their outlook for interest-rate cuts by the Federal Reserve. Longer-term bond yields have remained elevated, as well, and as if inflation concerns weren't enough to rattle investors, there are also worries about the turmoil in the Middle East and the coming presidential election in the U.S.
Despite these issues, many money managers and market strategists are optimistic that U.S. equities will continue to climb. They see April's pullback as a healthy pause after several strong quarters, and a prelude to further stock market gains.
"Investors got lulled into complacency," said Mike Bailey, director of research with FBB Capital Partners and a participant in Barron's latest Big Money poll. "The market got slapped in the face, and it feels ugly and painful, but things are getting back to normal now. Five-percent pullbacks are part of the game. I'm not sensing a major change in the markets and economy."
Neither are many of his peers. Fifty-two percent of poll respondents said they were bullish about the outlook for stocks over the next 12 months, up from 38% last fall, with another 33% describing themselves as neutral. About 15% said they were bearish, down from 24% last fall.
Not coincidentally, perhaps, about 15% of respondents also said they anticipate a recession.
The Big Money bulls forecast that the Dow Jones industrials will end 2024 at about 41,231, 9% higher than current levels. Market optimists had a mean forecast of 5461 for the S&P 500 index and 17,143 for the Nasdaq -- up 9% and 10%, respectively, from where the indexes were trading on May 1.
The bears had a mean target of 37,281 for the Dow and predictions of 4753 for the S&P 500 and 14,650 for the Nasdaq.
The spring edition of the Big Money poll closed on April 18 and generated responses from nearly 120 investment professionals across the country. The survey was conducted by Barron's with the help of Erdos Media Research in Ramsey, N.J.
In the latest survey, 43% of managers called the market overvalued, down from 48% last fall. Just 5% considered stocks undervalued, with a plurality in the "fairly valued" camp.
While the economy has slowed a bit, with first-quarter gross domestic product growing at a lower-than-forecast 1.6% annualized rate, bulls still find reasons for optimism. Retail sales have held up well so far this year, due in large part to a labor market whose strength has defied almost all expectations. Nonfarm payrolls grew by 175,000 in April, and an average of 233,500 a month over the past 12 months, according to government data.
"We've had this narrative ping-pong about the economy going from a hard landing to a soft landing to no landing to maybe back to a soft landing, " said Lori Keith, director of research and a portfolio manager with Parnassus Investments. "There has been a lot of short-term noise, but the economy has been fairly resilient. Consumer spending remains strong."
"Is higher for longer really that bad?" said FBB's Bailey, referring to interest-rate policy. "Historically, the Fed cuts rates to stop the bleeding in the job market. Maybe it's OK to sit around in this steamy economy with all this inflation, but enjoy it with all our fully employed neighbors."
A "steamy" economy should lead to strong profit growth, and healthy earnings will be needed to keep the market rising. Big Money participants forecast a 12% jump in earnings per share for the S&P 500 in 2024, slightly ahead of consensus forecasts for an 11% increase.
Technology and energy were the managers' favorite stock sectors. Both are expected to post solid profit growth this year due in part to artificial intelligence and rising oil prices.
"The economy is better than anyone would have thought," said Eric Green, chief investment officer with Penn Capital Management. "It's the opposite of a year ago, when we were worried about the Fed raising rates into a likely slowdown. Now, they will be potentially lowering rates in a better economic environment. I don't see a big slowdown ahead in the markets."
As with the economy's resilience, the growth of AI applications also bodes well for earnings and stocks.
"AI is a new technological revolution that is unlocking a lot of productivity gains similar to the mid- to late-1990s," said Spencer Shelman, a portfolio manager with Palouse Capital Management. He described himself as "cautiously bullish" and said he "hesitates to call this market a bubble," partly because he expects that AI will help boost the nation's economic output.
A reduction in interest rates, when it occurs, could be interpreted as a sign that the economy is heading into a downturn and that profit forecasts are too high. This is a concern of the Big Money bears. One investment strategist noted that the inverted yield curve, with short-term interest rates higher than long-term rates for nearly two years now, is typically an accurate predictor of an eventual recession.
"The lowering of rates will mark the beginning of a recession," said Chris Ryan, CEO of Ryan Investments. "The Fed is on pause, waiting to cut. We're fully invested at the moment but nervously so. We encourage investors to have a plan for once the markets and economy slow."
Other skeptics worry that the Fed won't come to the market's rescue.
"It's Pollyannaish to think there will be rate cuts this year," said Scott Black, president of Delphi Management. "There is no reason to think that the market will go up from here. Valuations are pretty full, and I don't see interest rates coming down. Current estimates for earnings growth aren't realistic."
Black notes that first-quarter profits are expected to fall 6%, excluding results from the so-called Magnificent Seven stocks -- Amazon.com, Alphabet, Apple, Microsoft, Meta Platforms, Nvidia, and Tesla. That makes the S&P 500 look even more pricey.
The index is currently trading at about 20 times earnings forecasts, above the five- and 10-year average. That means strong earnings news might not be enough to keep the rally going. Companies are going to have to raise the bar and consistently beat estimates to justify higher stock prices, pessimists say.
"Investors are going to become more demanding. The news can't only be good but surprisingly good," said Mark Luschini, chief investment strategist with Janney. Before the April market pullback, he said, "conditions were overbought" and "valuations were stretched."
Many of the biggest tech stocks are trading at even higher valuations, which is giving some investors pause. The managers said they considered chip giant Nvidia and Elon Musk's Tesla among the market's most overvalued stocks. Nvidia is valued at nearly 35 times this year's earnings forecasts, and Tesla has a price/earnings ratio of more than 70 based on next year's profit estimates.
"Nvidia stock isn't going to grow another 200% this year. There is no way that is going to happen," said Sean Sebold, president of Sebold Capital Management, referring to the stock's nearly 240% gain in 2023. Sebold said he isn't suggesting there is anything wrong with the company's fundamentals. It's just that the valuation is ahead of itself.
He thinks investors looking for opportunities are better off identifying undervalued stocks. To that end, his top pick is oil producer APA, formerly Apache, as a broader bet on rising crude-oil prices and solid earnings for the energy sector.
The Big Money managers believe that persistently higher bond yields (and interest rates) will remain in the cards for the rest of the year. None said they expect inflation to return to the 2% annual level that the Fed has targeted, and only 23% forecast an increase of just 2.5% year over year, as measured by the consumer price index. Nearly half said inflation will end 2024 with a 3% year-over-year gain, and nearly 30% forecast an annual CPI increase of at least 3.5%. CPI was up 3.5% over the past 12 months as of March.
As such, nearly 40% of Big Money respondents said they expect the target for the federal-funds rate to be 4.75% to 5% by year's end, down from a current 5.25% to 5.5%, while another quarter of the survey's participants predicted a 5%-to-5.25% target range. That implies just one or two interest rate cuts this year, down from forecasts of five or six cuts at the end of 2023. Fifteen percent of poll respondents indicated that they don't expect the Fed to cut rates at all, and about 3% even suggested that a rate hike could be in the cards.
"There is a tug of war going on between whether inflation is on its way down to 2% or will be stuck at a level closer to 3%. The answer to that question determines if and when we get some Fed interest-rate cuts this year," said Peter Tuz, president of Chase Investment Counsel.
The interest-rate stasis is affecting expected returns on bonds. Nearly 56% of Big Money managers said that the yield on the benchmark 10-year Treasury will end the year in a range of 4.25% to 4.75%. The 10-year currently yields about 4.62%. Bond yields have remained elevated this year, hurting fixed-income investors who had been anticipating a fall in yields and a corresponding increase in bond prices (which move inversely to yields).
"There has been a lot more volatility on the bond side over the past few months," said Mark Scalzo, chief investment officer with Validus Growth Investors. "You expect more volatility with stocks."
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May 03, 2024 21:30 ET (01:30 GMT)
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