Stocks are rising again. Why this rally could last into spring.

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This commentary was recently written by money managers, market research firms and market newsletter writers and is published by Barron’s.

Don’t fight the rally

Market Commentary/Strategy

stalk
3 March: The pessimistic chorus of Wall Street strategists continues to fight back

S&P500
Rally since intraday low (3,491.58) on Oct 13, 2022 as these strategists went from recession imminent (Fed caused) to no recession (so Fed must cause one). Some say it’s a “bull trap,” but that’s missing out on important trades in a range-bound, decade-long channel. You can call it a bear market rally, a bear trap, or a banana.

We are not ignoring possible six-month rallies of 10% to 15%. Some say the equity risk premium is low (in a “death zone”) but incorrectly compare earnings yield (a real yield) to nominal Treasuries and use suboptimal expected earnings yield (EPS/price, price-to-earnings ratio on stocks). upside down). instead of superior cyclically adjusted P/E (we use operating EPS to calculate CAPE earnings yield).

On October 24, 2022 (S&P 500 close at 3,797), we had forecast a 13% six-month rally in the S&P 500 to 4,300 by April 2023, which is still our view. Downside risk is an issue in 4Q23, but in a secular bear market, investors’ time horizons need to shorten (and strategists need to do the same).

Barry B Bannister, Thomas R Carroll

Too much bearish sentiment

Ivan Feinseth Market View 360

Tigress Financial Intelligence
3 March: Bearish sentiment remains high, with the Association of Individual Investors’ latest bearish sentiment index rising to 44.8% from 38.6% the previous month, hitting its highest level since late 2022 and well above the historical average of 31%. Bearish sentiment and ongoing calls for further declines in US equities continue to support equities, particularly with extreme bearish and defensive positioning that could unravel at any time and fuel an upside rally.

Ivan Feinseth

The result is in motion

The wise speculator

Partner of the Kovitz Investment Group
3 March: economic statistics in [fourth quarter] weren’t exactly something to write home about. However, real (inflation-adjusted) US GDP growth came in at 2.7% in the fourth quarter, which supported solid Corporate America sales and net income numbers even as management teams scaled back their usual forecasts. Impressively, the number of S&P 500 companies that beat earnings forecasts was 68.6%, which is the usual “beat” rate, while 58.3% blew past sales forecasts…

Standard & Poor’s forecast (as of February 28) that after falling from $208.21 in 2021 to $196.09 in 2022 (last year’s figure included a massive $66.9 billion). [$4.74 per share] “unrealized investment” loss

Berkshire Hathaway

in the second quarter), bottom-up operating earnings per share for the S&P 500 will increase to $219.13 in 2023. Estimates are subject to change (current projections are lower than three months ago) and much will depend on the health of the US and world economies, but anything near that number of 23 should support much higher stock prices.

John Buckingham

The small-cap advantage

Weekly strategic insights

Waddell & Associates
3 March: So far in 2023, stocks of smaller companies have risen more than those of larger companies

S&P 600 Small Cap
Index with a return of 8.2%, the

S&P 400 mid cap
Index returning 7.5% and the S&P 500 Large Cap Index returning 3.22%. We attribute this to a valuation reversion to the mean that could continue for quite some time. The largest stocks in the S&P 500 have been grossly overvalued and overvalued, with the top five companies in the S&P 500 accounting for 26% of the total index value before the 2022 drop.

Today, they make up about 21% of the S&P 500’s index value. If you compare price-to-earnings, the S&P Small Cap Index is trading at 13.7 times earnings; S&P Mid Cap Index trades at 14.2 times earnings; the S&P 500 Large Cap Index is trading at 17.5 times earnings, while the Mega-8 (

Apple
,

Amazon.com
,

alphabet
,

meta platforms
,

Microsoft
,

Netflix
,

NVIDIA
,

Tesla

) trade at 25.5x profit. The overwhelming proportion of these few companies in the S&P 500 index primarily determines performance. If we compare the small-cap index’s valuations to these megacap heavyweights, it’s trading at a discount of 45%. These large valuation differences invite convergence and give small-cap investors ample scope for continued outperformance.

David S Waddell

real estate distress

The weekly speculator

Market Field Asset Management
3 March: Adjustable rate financing casualties continue to occur, with a growing trend of “voluntary defaults” in commercial real estate. This euphemism is used to describe a borrower’s attempt to force a securitized loan into default so that the Special Servicer can intervene to renegotiate the terms of a loan. In theory, this can be a “win-win” process, where the borrower pays an interest rate they can afford and the lenders still receive a return in excess of what they expected at the time of the securitization.

However, this has an obvious limit, and the keyword to focus on is “default” rather than “voluntary”. This applies in particular to projects where letting activity is well below expectations. We are increasingly convinced that we are witnessing the beginnings of a distressed cycle in commercial real estate (both office and apartment buildings) that will significantly exceed expectations. We suspect that pressure is also building for heavily indebted corporate issuers, but the same signs have yet to show.

Michael Shaoul, Timothy Brackett

Bosnian scale

Titled from an essay by Raphael Bostic, President and CEO of the Federal Reserve Bank of Atlanta “Finding a delicate balance in policy making.”
1st March: So now we need to determine when inflation is trending irrevocably downward. We’re not there yet, so I think we need to raise the federal funds rate to 5% to 5.25% and keep it there well into 2024.

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