Under the backdrop of 'higher for longer', what is the trend of the US stock market? Goldman Sachs and Bank of America have different views.
Facing the reality that interest rates will remain high for a longer period of time, can the US stock market continue its upward trend this year? Two of Wall Street's most famous US stock strategists recently gave different opinions.
According to the Zhongtong Finance APP, facing the reality that interest rates will remain high for a longer period of time, two of Wall Street's most famous US stock strategists have given different opinions on whether the US stock market can continue its upward trend this year.
Michael Wilson, a Morgan Stanley strategist who firmly believes in a bearish stock market, said that the correlation between real interest rates and stock returns has further dropped to negative values, indicating that interest rates have once again become a determining factor in stock market performance. However, Savita Subramanian of Bank of America believes that if interest rates remain high, the stock market can still thrive.
Wilson, who correctly predicted the stock market crash in 2022 but failed to predict this year's rebound, wrote in a report to clients on October 1st: "Since mid-July, the stock market has undergone significant changes." He added that the decline in the US stock market after the latest Federal Reserve meeting last month indicates that investors "are starting to question the 'higher for longer' argument."
The general weakness of US stocks since the summer has proven Wilson's pessimistic view. The S&P 500 index fell continuously in August and September, partially erasing the double-digit gains so far this year.
On Monday, US stocks continued to decline due to rising bond yields, further weakening investors' preference for risk assets. Last Friday, US stocks ended their worst month of the year, with weeks of selling due to concerns about the impact of restrictive monetary policy on economic growth.
In contrast, Subramanian of Bank of America believes that there is reason to remain optimistic even if borrowing costs remain high. She said that first, the proportion of large-cap companies shrinking to small-cap stocks is 50% higher than the opposite, which is the opposite of the situation in the past few decades, indicating that higher capital costs have "eliminated the weak" and put the S&P 500 index in a "good state".
In addition, she pointed out that from 1985 to 2005, the annualized return rate of the S&P 500 index was 15%, while the actual return rate was 3.5%. It is reported that after missing out on the uptrend in the first half of this year, Subramanian was one of the first sell-side strategists to have a positive attitude towards US stocks this year. Since May, this strategist, who also correctly predicted last year's stock market crash, has raised her year-end forecast for the S&P 500 index twice.
Goldman Sachs is also optimistic about US stocks. These bulls view the recent decline as a normal seasonal downturn and point out that the stock market is undervalued, and the upcoming earnings season is a reason to buy, and investors should be prepared for a potential rebound at the end of the year. Goldman Sachs said on Monday that the recent sell-off has led to historically low valuations for tech stocks, as earnings expectations continue to rise. This suggests that the stock market may experience a surge similar to earlier this year.
Bank of America also pointed out that the recent pessimism is another reason to buy stocks. The bank's sell-side indicator, which tracks the sentiment of sell-side strategists' stock allocation recommendations, remained at levels before the rally for 95% of the time in September.
The bank stated, "Wall Street is bearish, lacking confidence, (thus the stock market) is stagnant." However, it advised, "Buy stocks, sell bonds."