In a recent note to clients, Manish Kabra, the head of U.S. equity strategy and multi-asset strategist at Societe Generale, shared an optimistic perspective on the future of the S&P 500. Despite the current uncertainties in the market, Kabra believes that the upcoming six months present an opportunity to "buy the dip" and capitalize on potential gains.
Expectations of Profit Growth
Kabra's positive outlook stems from his expectations of improved profit cycles in the next two quarters. He predicts that corporate profits will accelerate, resulting in a target range of 4,050 to 4,750 for the S&P 500. While a mild recession may occur in mid-2024, this should lead to a higher risk premium and ultimately drive the S&P 500 back to 3,800.
Kabra's viewpoint differs from some skeptics on Wall Street, such as Morgan Stanley's Mike Wilson. Wilson has expressed doubts about the staying power of earnings this year, attributing the recent upward trend in major U.S. equity averages to higher valuations. He highlights that forward price-earnings multiples reached 20 times on the S&P 500 last month, suggesting that stocks now require higher earnings and growth to sustain their current levels.
Current Performance and Future Expectations
As of now, the S&P 500 has achieved a 10% gain in 2023. Simultaneously, the yield on the 10-year Treasury note has increased from 3.8% at the beginning of the year to 4.71% as of Thursday. Looking ahead, analysts anticipate a modest decline of 0.3% in year-over-year earnings for S&P 500 companies in the third quarter. However, they are more optimistic about the fourth quarter, projecting growth of 8.2%. It is worth noting that if the S&P 500 experiences another negative quarter of growth, it would mark the fourth consecutive one.
In conclusion, Manish Kabra's positive outlook on the S&P 500 suggests that the market may still offer an opportunity for investors to "buy the dip" in the next six months. With expectations of improved profit cycles and potential growth, Kabra's perspective offers a contrasting view to those who doubt the sustainability of current earnings. As always, it is essential for investors to carefully evaluate market conditions and conduct thorough analysis before making any investment decisions.
The Global Profit Cycle According to Societe Generale
Societe Generale believes that the global profit cycle is still experiencing an upturn, and despite negative signals from lending standards, credit spreads are not rising substantially. The bank points to the signals from earnings per share estimate dispersion, which indicate fundamental volatility.
The Question on Wall Street: How High is Too High for Bond Yields?
Wall Street is currently concerned about how high bond yields can go before becoming a problem. Societe Generale provides an answer, stating that rising yields will only be a risk if the profit/growth cycle turns negative. Currently, positive signals are being observed, with the SG Global Cycle Indicator improving, driven mainly by the US. Additionally, fundamentals such as EPS estimate dispersion continue to decrease, which supports credit spreads.
Societe Generale's Best-Estimate Ranges for 10-Year Yields
Societe Generale has outlined its best-estimate ranges for 10-year yields in various scenarios:
- No recession: U.S. 10-year yields ranging between 4-5%, S&P 500 = 4,050-4,750.
- Mild recession (Societe Generale's 2024 base case): U.S. 10-year yields ranging between 3-3.5%, S&P 500 = 3,800.
- Hard landing (recession): U.S. 10-year yields ranging between 2.5-3%, S&P 500 = 3,100-3,500.
- Irrational exuberance (no landing and risk of a global event triggers Fed easing): In this scenario, the S&P 500 could reach new highs.
Differing Views Within Societe Generale
It is worth noting that while Societe Generale's view remains positive, there is some variation in opinion within the bank. Strategist Albert Edwards has issued warnings of a potential 1987-style event for stock markets if the bond market does not cool off. Edwards believes that any hint of a recession now would be a devastating blow to equities.
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