Wall Street’s Stock Market Calls Vary by Firm — and by Floor

This year’s astounding run in the S&P 500 Index has left forecasters split about what the world’s largest stock market will do next, and on Wall Street, the biggest disagreements often are emerging within the same firm.

(Bloomberg) — This year’s astounding run in the S&P 500 Index has left forecasters split about what the world’s largest stock market will do next, and on Wall Street, the biggest disagreements often are emerging within the same firm.

Take Morgan Stanley. At the company’s brokerage, strategist Mike Wilson says US stocks will fall more than 10% before the year is out. On the asset management side of the bank, portfolio manager Andrew Slimmon reckons they’ll hit a record high.

It’s a similar story at BNP Paribas SA and UBS Group AG. The house views from the research teams at their brokerage operations paint a far grimmer picture of the outlook for US equities than their colleagues in investment management are positioning for. 

Across Wall Street, strategists at brokerages — the sellside, in Wall Street jargon — have cited the spate of interest rate hikes from the Federal Reserve as well as consumers’ depletion of their Covid-era savings as reasons to shun stocks. But those managing money — the buy side of financial markets — point to the improving outlook for corporate earnings, a trend that’s hard to ignore when doing so means your fund underperforms the market a bit every day.    

“If you’re a portfolio manager, you’re seeing revisions are going up, and if you don’t own these stocks, it is painful every day,” Slimmon, senior portfolio manager at Morgan Stanley Investment Management, said in an interview. “If you’re a strategist, you don’t have to get on the scale every day.”

The pessimism by some strategists may reflect in part a hangover from last year, when many bullish firms were blindsided by the 19% drop in the S&P 500. Coming into 2023, the average sellside forecast called for a drop in the index again this year, the first time the aggregate prediction had been negative since at least 1999. But that pessimism turned out to be misplaced.

Indeed, Wilson — one of Wall Street’s staunchest bears — has maintained his S&P 500 price target of 3,900, implying a gain for the full year of just 1.6%, even with the US stock benchmark up 16% at this point in 2023 at about 4,460. While admitting he was too pessimistic on stocks in the first half of the year, the strategist hasn’t budged on his view that a boom-and-bust cycle is still under way.

Slimmon’s calculus tells him a different story. He predicts that expectations for positive earnings growth in 2024 and a rush of sidelined cash piling into shares will lift the benchmark to as high as 5,000 points.

At JPMorgan Chase & Co., the bank’s markets chief Marko Kolanovic — who represents its house view — has sounded the alarm on lofty equity valuations, warning that investors are underestimating potential economic blows from the delayed effects of central bank tightening as well as geopolitical risks.

JPMorgan Asset Management shares the view that the rally in mega-cap stocks has gone too far. However, global market strategist Hugh Gimber said he sees opportunities beyond the biggest companies, a contrast from Kolanovic, who has steadily trimmed his equity allocation this year on concerns of an economic downturn.

Over at BNP Paribas, chief US equity strategist Greg Boutle held the lowest year-end price target on Wall Street until Tuesday: 3,400. The strategist said Wednesday that he moved it up to 4,150 ahead of an outlook presentation set for later this week. His call for a 7% drop from here is based on an expectation of cuts to earnings estimates as the economy slows. At the bank’s asset management subsidiary, Head of Equities Geoff Dailey expects a soft landing for the US economy and says it bodes well for stocks.

JPMorgan, Morgan Stanley and BNP Paribas all declined to comment. 

US stocks pulled back in early August as investors came to accept the idea that the Fed will keep interest rates higher for longer to try to quash inflation. But with data signaling continued resilience in the economy, the S&P 500 has already recouped most of those declines and is above the median year-end price target of 4,300 from brokerage strategists.

Part of the reason for the divergence between the two sides is that strategists have a tall task in catering to the different time horizons that investors follow, according to Evgenia Molotova, senior investment manager at Pictet Asset Management.

“The sell side is about the story telling,” Molotova said. “Nobody is looking at the price targets — the sell side is like a sounding board for the industry.” Given the rally in the first half, it’s now risky for strategists to switch to bullish calls, she added. For her part, she said, “I don’t believe in the constant doom and gloom projections. The economy is still too strong.”

Not everyone in investment management is bullish.

UBS Global Wealth Management’s David Lefkowitz, citing cautionary signals from the economy, says US stocks will be little changed for the rest of the year. Still, his expectation for the S&P 500 to close 2023 around 4,500 towers over UBS’s house target of 3,900.

“This cycle has just been very confusing — the normal signals that are typically helpful, have not been helpful,” Lefkowitz said. “When you’re managing money, you have less tolerance for underperformance. We see the numbers on the scoreboard every day and perhaps that makes some people on the buy side quicker to react.”

(Updates with BNP Paribas’ new year-end S&P 500 target in 11th paragraph)

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