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:
- 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."
- 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."
- 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."
- 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."
- 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."
- 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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To FOMO or not to FOMO? SocGen counters six bullish stock arguments