TLT - To FOMO or not to FOMO? SocGen counters six bullish stock arguments

2023-05-23 10:00:36 ET

With the broader stock market still up solidly year to date, a big question for investors is whether or not to succumb to the fear of missing out ( FOMO ) and put cash to work in equities, according to Societe Generale.

In 2023, U.S. equities ( NYSEARCA: SPY ) ( QQQ ) have outperformed U.S. bonds ( TBT ) ( TLT ) ( SHY ) ( IEF ), U.S. credit ( HYG ) ( JNK ) ( LQD ), cash ( JPST ) and commodities ( DBC ) ( GSG ).

"Our take: do not sweat the rally - the S&P 500 ( SP500 ) ( IVV ) ( VOO ) is likely to stay in 3500-4200 range while credit risks and bond volatility pick up again," Manish Kabra, SocGen head of U.S. equity strategy, wrote in a note Tuesday.

SocGen's allocation favors "Cash, Bonds, Credit and Equities in that order, a tough start for sure!" Kabra said. "In our recent US Equity Outlook report, we concluded a mild recession is needed to kick-start a secular bull-run in US stocks and for us to increase the equity allocation in our Multi-Asset-Portfolios. However, recession has not arrived yet."

"We assess the six bullish arguments and conclude not to FOMO, as one can still debunk the bullish arguments."

The arguments for Overweight U.S. stocks:

1. Net EPS upgrades, best EPS beats in six quarters . - Counter : "EPS beats were on the back of lowered estimates, EPS growth is already negative yoy and cyclical leading indicators suggest two quarters of declining profit margins ahead."
2. The last Fed hike . - Counter : "The last Fed hike also starts the negative lag effect of the hiked rates on the economy. Credit standards get even tighter until yield curve is 100-150bp positive. Tight credit drives higher defaults, credit spreads and unemployment: internals of US stocks are suggesting investors should be wary of a potential credit shock ahead."
3. Equities outperforming every asset class . - Counter : "Leadership is extremely narrow, with 8 out of 11 equity sectors seeing equal-weighted indices underperforming. Moreover, remove the top 20 AI-Boom stocks and the S&P would be down 2%, not up 8% this year."
4. Stocks not expensive compared to bonds . - Counter : "The S&P 500 is expensive on 9 out of 10 valuation measures, and value investors may only buy the S&P once it is at 2950. Value investors may not get a chance to buy US stocks in this cycle, as at 3500 we would discount the EPS downgrade cycle."
5. No recession this time . - Counter : "The sooner we get disinflation, higher unemployment (4-5%), Fed rates (2-3%), and yield curve (+100-150bp), the sooner the secular bull trend will resume for broader equities, not just a concentrated part of the market."
6. Hedge funds net short 2 standard deviations on S&P . - Counter : "Positioning has stayed a contrarian positive argument since August last year, but with markets’ recent rally, there is a disconnect between stocks’ performance and positioning, i.e. performance is already running ahead of contrarian positioning. Moreover, positioning and sentiment arguments are not that helpful for 2H, unless credit makes a strong rally."

Kabra suggests these U.S. cross-asset trades:

• Stocks : "S&P 500, range 3500-4200 until we hit the recession in 1Q24, the sooner the better as Fed starts rate cuts; Long defensive Growth, Strong balance sheet, avoid Value ( IWD ), Small ( IWM ); Neutral cyclical/defensives with preference for Staples ( XLP ) (Bond vol and credit downturn) and Industrials ( XLI ) (US fiscal boom)."
• Credit : "Long non-financials over senior Financials; Our Fixed Income team downgraded US HY and Investment Grade last week after being bullish over the last six months."
• Rates : "2s10s, 5s30s, 10s30s steepeners."
• FX : Short dollar vs. yen ( USD:JPY )

More on U.S. markets

• Is The S&P 500 Set Up For The Next Leg Down In The Bear Market?
• Goldman Sachs picks top stocks in case of a hard landing
• SJB: This ETF Has Won Big At HYG's Expense, And Will Again
• U.S. Dollar: Economic Math Vs. Prevailing Narrative

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