Bloomberg News reports that strategists of Morgan Stanley and Citigroup Inc. strategists are divided over whether earnings can offer the much-required fuel for the US equities in the latter part of the year.
What’s More?
US stocks that are battered are most likely to rally in the rest of 2022 as the corporate earnings continue to stay resilient to escalating inflation, thereby causing a slowdown in the economy’s growth, according to Citi.
The Citi strategists being led by Scott T. Chronert have written in a note on Friday that the present risk-off position and earning resilience in the latter part set the stage for a mean reversion trade which is higher into the end of the year. They anticipate that the S&P 500 will finish at 4,200 this year, which is around 7.7% higher compared to the recent close and a drop of 12% for the entire year.
This view contrasts sharply with what Michael J Wilson of Morgan Stanley, one of the most vocal bears of Wall Street, has to say. According to Michael J Wilson, US earnings are likely to face another headwind which will be massive due to a rising dollar and anticipates that the latest rally in stocks will be fizzling out. Wilson also states that the S&P500 bear market is slated to continue and is seeing a fair value of 3,400 to 3,500 in the event of a soft landing, and in a recession, it is 3000, which is 23% in comparison to the downside of Friday’s close.
Bloomberg News reports that strategists at Citi cite a strong correlation between earning growth and the trajectory of the Federal Reserve. In the past, it was typical for a rise in earnings as Fed tightened the policy to contract, as the Federal Reserve switched to ease in response to the weakness in the economy.
US stocks have slid in the current year due to a toxic mix of the Federal Reserve being hawkish and the escalating prices that triggered fear of an impending recession. There has been an attempt from the S&P 500 to rebound after plunging into a bear market. Still, the gains have been arrested by fears that the earning season in the second quarter, which is slated to begin next week, will manifest a steep cut amidst a deteriorating consumer outlook.
Citi strategists believe that any combination comprising slow economic activity coupled with decelerating inflation is anticipated to trigger a stronger end in the current year.
