MW Bank of America says don't count out U.S. stocks just yet. HSBC downgraded them for second time in a month.
By Steve Goldstein
Buy the dip or sell the rip? Two of the world's biggest banks weighed in opposite sides of the argument on Tuesday.
In the "buy" camp were derivatives strategists at Bank of America. "While some are giving up on U.S. exceptionalism and questioning the strength of 'buy the dip,' we think the biggest risk may be losing sight of longer-term dynamics and counting U.S. equities out prematurely," said the team led by Riddhi Prasad.
They made several points. First, they brought up their 2025 outlook, when they noted it's probably not been the case since the 1920s for an asset bubble - they pointed to artificial intelligence-related stocks - alongside a big public policy shift.
So far, the rebound is very much in line with the historic response, they added. The S&P 500 SPX is up 4.5% in the seven trading days since March 13, which is in line with other corrections. The index is just 1.2% away from recovering half of the drawdown, which since 2000 has taken an average of 10 days.
Rotations and drawdowns are not abnormal in a tech bubble, they added. They cited previous research finding that in the 1990s, there were 10 Nasdaq drawdowns greater than 10%, and numerous rotations where value and non-U.S. equities outperformed tech by 20 percentage points.
Policy puts, they added, may be struck lower but aren't dead. They said the Trump put is struck in fragility - i.e., the White House would change policy in a shock or if either rates or inflation were to rise from their actions. They added that Fed Chair Jerome Powell, in his last press conference, didn't seem unwilling or unable to rescue markets or the economy in times of stress.
HSBC strategists, who earlier in the month downgraded U.S. equities to neutral, now have moved their rating to underweight. They're also underweight U.S. investment-grade and high-yield corporate debt.
Strategists led by Max Kettner said the biggest change since Inauguration Day is how the new U.S. administration's policy proposals have depressed both household and corporate sentiment.
"The crucial point is that while a month ago one might have been able to dismiss the deterioration in some of the leading indicators as either i) normalization from abnormally high levels following the post-election surge, or ii) one-offs or outliers, there are now too many indicators showing steep drops in expectations or actual activity," they said. The Fed's own forecasts also have a deflationary flavor to them, even as the central bank has largely dismissed such concerns.
They said markets are now in a risk-off regime. While risk-off periods are typically not long-lasting and become self-defeating, it's not at the point where bad fundamental news no longer moves the needle or where valuations are cheap enough. Low-quality stocks have held up, while cyclicals have only started to underperform.
The HSBC team said U.S. underperformance may be a matter of weeks rather than months or quarters. "Magnificent Seven" stocks, relative to the S&P 500, now are trading below the average valuation since 2018.
"So the medium-term outlook for equities remains positive," they said. "In addition, the actual earnings impact from tariffs is rather low, according to our equity strategists' analysis. So it's really the confidence and sentiment channels that we are worried about."
Finally, they said the Fed put is a long way away from being struck. While the median rate dote for this year was unchanged, the average dot increased. And the Fed slowed rather than ended quantitative tightening, which they say was likely done to underline the technical nature of the move.
"This doesn't scream Fed put. We do think this is still some ways off," they said.
-Steve Goldstein
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(END) Dow Jones Newswires
March 25, 2025 07:33 ET (11:33 GMT)
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