Where’s the Stock Market Headed? Big Money Managers Are Getting Less Bullish.

News Room
16 Min Read

Troubled times on Wall Street have given way to muddled times. Investors expect the Federal Reserve to cut interest rates later this year, but Fed officials have indicated that’s far from the plan. Economists are predicting a recession, yet unemployment is lodged near record lows. And even as companies warn of leaner days, analysts are forecasting record earnings for 2023.

No wonder trading is somnolent, and investors lack conviction. Their consternation comes across clearly in Barron’s latest Big Money poll, and was evident in conversations with many respondents. Only 36% of the professional investors we surveyed in the past month describe themselves as bullish on the outlook for stocks over the next 12 months. The same percentage say they are neutral, while the remaining respondents, 28%, put themselves in the bearish camp.

“The remainder of the year is going to be a battle between earnings coming down [and] a moderating interest-rate picture as the Fed gets closer to being done with rate hikes,” says Ted Bridges, CEO and chief investment officer of Omaha, Neb.–based Bridges Trust, who stands with the bulls. “That process could be marked by a lot of volatility, as investors get comfortable with where earnings are going to be and then decide on the right valuation to apply to those earnings.”

Last fall, toward the end of one of the worst years ever for U.S. stocks, 40% of managers were bullish. But the pros are enjoying decent market gains this year, which might have tempered the Big Money respondents’ optimism about the future. The
S&P 500 index
is up 8%, to about 4130, led by growth stocks, while the Bloomberg U.S. Aggregate Bond Index has returned about 3%.

Bullish managers see the S&P 500 gaining 1% through the rest of this year, and 8% through June 30, 2024, to reach 4450. The bears expect the index to fall 13% from its current level through year end, and to lose 8% through the middle of next year, sinking to 3801.

Bonds have more fans among the Big Money managers than they’ve had in recent years, due to the juicy yields now on offer. Indeed, 52% of managers expect bonds to deliver a higher return than stocks in 2023. Other defensive plays are also in vogue: The managers’ mean forecast calls for gold to hit a record high within a year of $2,106 an ounce, up from $2,007 last week.

Barron’s conducts the Big Money poll twice a year, in the spring and fall, with the help of Beta Research in Woodbury, N.Y. We survey institutional investors across the country about their views on the economy, markets, and investing. Some 130 managers participated in the latest poll, which closed in early April.

The interest-rate outlook is the key variable for most investors these days—namely, will the Fed keep raising rates to cool inflation, or pause, or pivot to lower rates as prices fall and the economy weakens? Two-thirds of poll respondents see the federal-funds rate finishing the year at 4.5% to 5.25%, versus a current target range of 4.75% to 5%. In other words, the central bank is almost done hiking, but investors shouldn’t count on rate cuts this year.

“I don’t think anybody would disagree that the Fed was slow to react to inflation going up,” says Josh Frazier, chief investment officer at Frazier Financial Advisors, near Columbus, Ohio. “Now there is a fear—rightfully placed—that they may be slow to react to inflation coming down.”

Most Big Money managers expect an inflation rate of 4% to 5% in 2023, as measured by the consumer price index, with inflation then falling to about 3% in 2024. Only 9% of respondents expect inflation to be at or below the Fed’s 2% target next year.

About 24% of managers see U.S. real gross domestic product contracting this year; 38% expect the economy to expand by about 1%, and 38% expect growth of 2% or more. Casey Nelsen, principal at Alta Capital Management in Salt Lake City, sees a mild recession starting in late 2023 or early 2024. “Consumer balance sheets look good for now, but they’re trending in the wrong direction as pent-up savings dwindle,” Nelsen says. “Things could get worse if the unemployment rate starts to go up. Economists will tell you that all the Fed rate increases over the past year are just starting to impact the broader economy.”

Almost a quarter of poll respondents call a U.S. recession the biggest risk to the stock market in the coming months, while 23% cite rising interest rates and 20%, disappointing corporate earnings.

Other investors are more sanguine: “I don’t see a prolonged recession coming,” says David Hartzell, president and CEO of Cornell Capital Management, near Buffalo, NY. “Most of my clients have businesses, and they’re really bullish. Main Street USA looks pretty good; they’re upbeat and positive and looking forward to another good year.”

While the failures of Silicon Valley Bank and
Signature Bank,
plus trouble at
First Republic
(ticker: FRC), rattled the market in March, briefly giving rise to fears of financial contagion, most Big Money managers aren’t concerned about the health of the nation’s largest and regional banks. What’s more, 66% approve of regulators’ response to the banking turmoil.

“It seems to me that the S&P 500 saw its bottom in October, and I don’t think we’ll see a major retest,” says Dan Chung, CEO and chief investment officer at New York–based Alger. “We’re approaching the end of the Fed rate-hike cycle….This is the beginning of a new bull market and the reassertion of growth stocks leading the market again.”

Still, valuations aren’t pricing in much room for error. At 18.4 times forward earnings, the S&P 500 is cheaper than it was a year ago, but well above its average of 15.7 times in the past 20 years. Only 8% of respondents called the U.S. stock market undervalued, while 47% considered stocks overvalued.

An adverse economic outcome could prompt the Fed to lower interest rates as soon as later this year, boosting the market’s price/earnings ratio, but that isn’t a winning strategy for stocks, either, the managers say. Much will depend on the magnitude of a potential earnings decline.

“The market’s move down last year was primarily one of valuations getting compressed by rising interest rates,” says Mark Keeling, senior vice president and financial advisor at Wealth Enhancement Group, in San Francisco. “What we haven’t seen yet is what could be another move down from earnings growth slowing or even going negative.”

Based on the Big Money managers’ mean forecasts, the S&P 500 could earn about $213 a share this year, which would be around 1.4% below last year’s total. At this early date, the managers expect 9% growth in profits in 2024, to $232.

A soft landing, in which the Fed tames inflation without pushing the economy into a recession, seems unlikely to many pros. “That would be a neat trick for the Fed to thread that needle,” Keeling says. “We’re rooting for it, but we’re not counting on it.”

More likely is a higher-rates-for-longer backdrop, says Bob Morgenthau, principal at Spears Abacus Advisors in New York. That would imply inflation and interest rates both holding above the ultralow levels seen in recent decades.

“We’re transitioning to a new era and going from a monetary cycle to an employment cycle,” Morgenthau says. “The disconnect between financial assets and the real economy that we’ve had over the past 40 years, and especially since the global financial crisis, is reversing. The real economy will be stronger than the financial markets.”

If rising wages weigh on corporate profit margins, which reached a 70-year high last year, investors will need to be more discerning, Morgenthau says. “We’re looking at companies that are the most efficient users of capital or those that don’t really need much capital to continue to expand their businesses,” he says.

Morgenthau points to tech giants
Apple
(AAPL),
Microsoft
(MSFT), and
Alphabet
(GOOGL) as the kind of capital-efficient companies with wide moats that can hold their premium valuations and continue to grow earnings.
Visa
(V) and
Mastercard
(MA) fit the bill, as well, but Morgenthau prefers cheaper stocks in the payments space:
Fidelity National Information Services
(FIS),
Fiserv
(FISV), and
Global Payments
(GPN).

Twenty-five percent of Big Money investors call technology their favorite sector, compared with 21% who favor energy and 19% who prefer healthcare. Keeling is among the healthcare bulls, and is a fan of pharma and insurance shares. 

Healthcare stocks have declined this year, he notes, making valuations more attractive, and he likes their defensive attributes. People still must take their medications and receive medical care, whether the economy is in recession or not, he notes.

Longer term, aging demographics in the developed world and improving access to medical care in emerging markets will boost demand for drugs and services. There is also plenty of technological innovation going on, from new ways of delivering care remotely to advanced techniques for developing treatments.

As for energy stocks, several poll respondents cited projected shortfalls in supplies of oil and natural gas during a protracted transition to renewable energy in coming years. That should keep energy prices high enough to support ample industry profits and strong shareholder returns, bulls predict.

The Big Money managers see little change in oil’s price over the next year. Their mean 12-month forecast is $78.23 a barrel, about where oil trades today.

Chung points to the continued strength of the U.S. job market—the unemployment rate was at 3.5% in March—and sees the Chinese consumer taking the baton should U.S. consumer spending slow. That dynamic was clear in
LVMH Moët Hennessy Louis Vuitton’s
(MC.France) results for the latest quarter, when sales in China took off, while those in the U.S. were relatively flat. Ditto for
Nike
(NKE). That dynamic should keep consumer-discretionary revenue aloft, he says, while cost-cutting from many companies and easing supply-chain issues help with profit margins.

“Consumer stocks might sound odd if you think we’re going into a recession,” Chung says. “But the drivers [of earnings growth in the sector] don’t depend on growing revenues. Margins will improve with cost-cutting, and the comparisons to last year are relatively easy.”

Chung is bullish on
Amazon.com
(AMZN), in particular, and consumer-discretionary shares exposed to travel and experiences, including
Airbnb
(ABNB) and
Booking Holdings
(BKNG).

Las Vegas Sands
(LVS), bigger in Macau than in its namesake city, and
Formula One Group
(FWONK) will benefit from a continued rebound in travel, Chung says. Formula One should also get a more lucrative U.S. television-rights deal after its current contract expires in 2025, due to the sport’s newfound popularity from the
Netflix
(NFLX) series Formula 1: Drive to Survive and more U.S. races.

There is more enthusiasm for bonds among Big Money managers than there has been in years. Bridges is focused on the lower end of investment-grade credit and some high-yield issues, where returns exceed those on Treasuries, and he has been extending duration in recent months to lock in yields. “I know I can run out and get more than 5% on a T-bill for six months,” Bridges says. “The 5% is fantastic, but the problem is the six-month part.”

Other managers similarly are cheering the yields on offer these days, while taking a more conservative approach to the fixed-income portion of their portfolios. “It’s fantastic that you can finally earn a rate of return on fixed income,” says Morgenthau. “But I’m boring when it comes to bonds: highest credit quality, stay short [duration.] You can’t get rich buying bonds, so you better not get poor, either.”

Nearly half of poll respondents called Treasuries as the most attractive fixed-income category today, followed by U.S. investment-grade corporate bonds. The managers generally remain short in duration, with a mean allocation of 61% to bonds with maturities under three years, and a weighting of only 8% to paper with maturities over 10 years. That’s a baby step toward extending duration, compared with that evident in last fall’s Big Money poll.

While stocks have rebounded somewhat after a punishing 2022, and bonds once more offer ballast, 2023 has been a tough year for investment pros. Only 53% of Big Money managers say they are beating the S&P 500.

Blame it on the same conflicting signals that gave rise to the spring poll’s indecisive readings. Alas, with stocks still pricey and the Fed’s path uncertain, there is no guarantee that clarity will prevail.

Write to Nicholas Jasinski at [email protected]

Read the full article here

Share this Article
Leave a comment

Leave a Reply

Your email address will not be published. Required fields are marked *