A decline of 10% in the benchmark S&P 500 stock index before the U.S. presidential election in November is “highly likely,” Morgan Stanley Chief Investment Officer Mike Wilson said in an interview on Monday with Bloomberg TV.
Among the reasons for a decline are uncertainty over how swiftly the Federal Reserve will bring interest rates down from nearly two-decade highs and falling pricing power on the part of companies, increasing the likelihood of disappointing earnings results, he said.
“The average company has not had good earnings results,” he said, adding that a nearly 17% gain in the S&P 500 for the year to date has been powered by a small number of companies.
At the same time, price to earnings multiples have been rising. “Valuations to me look very unexciting,” he said.
Wilson maintained a bearish outlook for the majority of this year, one of few prominent forecasters to do so. In late May, he lifted his base-case 12-month forecast for the S&P500, an estimate of what the fair value of the index will be in a year, to 5,400 points. At the time, that was only 2% above its level but 20% higher than his previous forecast of 4,500.
The S&P 500 closed Monday at 5,572, some 3% above Wilson’s 12-month target price.
Goldman Sachs Asset Management (GSAM) executives expect the U.S. economy to grow at a slower clip of about 2% in the second half of 2024, they said on Tuesday, with equity indexes seen largely flat due to declining earnings growth and political anxieties.
That makes the investment landscape more complex, but one that still presents opportunities, including a broader array of AI stocks, GSAM said in its mid-year outlook.
“It’s absolutely a soft landing,” said Lindsay Rosner, head of multi-sector investing at the asset management arm of Goldman Sachs. “As the data comes through, that’s what we’re seeing.”
The BlackRock Investment Institute (BII), an arm of BlackRock, also released its mid-year outlook on Tuesday morning.
“There is a real probability” that investors will see interest rate cuts in the United States in the second half of 2024, Rosner added. She does not expect the Federal Reserve to begin cutting until September, but added that rate cuts could continue at a pace of 25 basis points per quarter.
As interest rates fall, Rosner said she expected the fixed income market to benefit. She said she saw particularly interesting opportunities in the high-yield bond market and in structured credit.
By far the biggest trend in the U.S. stock market this year has been the dominance of a small handful of companies linked to the artificial intelligence (AI) theme, notably semiconductor giant Nvidia. Only five stocks and that single trend generated half of all stock market returns in the first six months of 2024, said Alexis Deladerriere, global equity portfolio manager and head of developed markets at GSAM.
The gap in returns between the S&P 500 and the index’s equal-weighted counterpart is at its widest in 15 years, underscoring the need to diversify beyond AI heavyweights such as Nvidia.
The S&P 500 is at record levels mostly due to a handful of megacap stocks such as Microsoft and Nvidia, fueling concerns that 2024’s rally could dissipate if the sentiment changes around those select AI-linked shares.
The spread in total returns between the S&P 500 and the benchmark index’s equal-weighted peer widened to 10.21% in the first half of the year, according to data from S&P Dow Jones Indices.
“We think you need to move away from the early winners” in AI and diversify exposure to this trend, he said.
As earnings growth decelerates overall and political anxieties mount both domestically and globally, Deladerriere said he anticipates U.S. stocks will remain largely flat in the second half of the year.
“We are seeing decelerating earnings growth” and the potential for domestic and global political events to unsettle U.S. stocks, said Deladerriere.
Deladerriere added GSAM views Indian and Japanese equities as particularly attractive at this point, as plays on trends ranging from AI to addressing climate change. He also noted the appeal of Japanese reforms to corporate governance.
“High valuations and lofty expectations lead to more market risks. If they fail to meet their lofty growth expectations, there will be a pullback in major indexes,” Cetera Investment Management’s chief market strategist Brian Klimke said.
The spread between the S&P 500 and its equal-weighted counterpart was the most since 2009, when tech stocks rebounded from a bruising selloff during the 2007-08 financial crisis.
The S&P 500’s top 10 stocks are now starting to approach levels seen during the dotcom bubble when their weightage in the index accounted for a little over 40%, Klimke added.
Excluding Nvidia, whose shares have more than doubled, the S&P 500 is up about 10% in the first half of 2024, and without the so-called “Magnificent Seven” stocks the benchmark index’s gains are just over 6%, S&P Dow Jones Indices data showed.
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