US stocks are showing "irrational prosperity"! Strategists warn: there is no short-term upside catalyst, and there may be a moderate pullback in the second half of the year
US stocks are showing "irrational prosperity"! Strategists warn: there is no short-term upside catalyst, and there may be a moderate pullback in the second half of the year. Megan Horneman, Chief Investment Officer of investment advisory firm Verdence Capital Advisors, stated that in the short term, the market lacks "upside catalysts" and is more influenced by negative factors. She believes that the market has already digested too many interest rate cut factors and is surprised by Chairman Powell's hawkish stance. She holds a cautious outlook on the market, unable to see any upside catalysts, and is concerned about the emergence of downside catalysts. She recommends increasing holdings in market value stocks and cash to take advantage of market pullbacks. There may be a moderate pullback this year, especially in the second half
According to the Zhitong Finance and Economics APP, after the announcement of the US CPI and the Federal Reserve interest rate decision this week, the US stock market continued to rise, with an overall optimistic sentiment in the market. However, Megan Horneman, Chief Investment Officer of investment advisory firm Verdence Capital Advisors, remains cautious, stating that in the short term, the market lacks "upward catalysts" and is more influenced by bearish factors.
Following the interest rate decision, the Federal Reserve released the dot plot, lowering the expected rate cuts for this year to once. Horneman pointed out that the adjustment of expectations by the Federal Reserve was not surprising, stating, "The market has already digested too many factors for rate cuts." However, she expressed surprise at Federal Reserve Chairman Powell's hawkish stance during the meeting, saying that his previous dovish tone "fueled optimism for rate cuts this year."
"We still believe that the Federal Reserve may need more consistent data to indicate that inflation has officially ended," Horneman said.
Regarding the near-term outlook for the market, Horneman remains cautious. She mentioned that the recent rebound in the market reflected the optimistic sentiment for rate cuts, which was evident in both the bond market and the stock market.
"But I am concerned that the market is a bit complacent about what we will see in the second half of this year and what they are capable of from the perspective of rate cuts."
"I really can't see any potential upward catalysts, that's the problem. That's why we are cautious about the market. I see more downward catalysts."
"You can look at it from a political perspective, what is happening in Europe right now. And don't forget, we are about to have a presidential election. The market is a bit frothy."
Strategic Advice
Given her cautious stance on the market, Horneman chooses not to increase holdings in technology-focused growth companies, or even in these industries, focusing on value stocks in the market allocation and increasing cash holdings to take advantage of opportunities after market pullbacks.
Horneman said, "I think there will be a moderate pullback this year, possibly in the second half of this year."
"To be honest, if you look at small and mid-cap stocks, you will find that this sector has not really participated in the current rebound," she added. The Federal Reserve will start cutting rates as the economic conditions deteriorate, and on the path out of recession, these stocks will see the biggest rebound.
"Therefore, if valuations consider downside risks, we can enter a bit earlier because they will rebound the most."