As stocks struggle to add to a stunning year-end rally, a slew of analysts are warning the bear market that started in June has room to run as looming corporate earnings in the coming quarters threaten to reveal the damage of the Federal Reserve’s interest rate hikes this year—setting the market up for a potential new low and at least a year of lackluster gains.
«The bear market is not over,» Goldman Sachs chief global equity strategist Peter Oppenheimer told clients in a Monday note, warning a «sustained recovery» won’t begin until interest rates peak, which Goldman economists don’t expect until next year.
As a result, Oppenheimer expects «more volatility,» with the S&P 500 hitting a «final» low next year but ending the year roughly flat at 4,000 points as stocks remain «highly sensitive to new information that changes [investor]
perceptions» about the economy.
The analyst says the current bear market is driven predominately by the economic cycle and rising interest rates, meaning it’s cyclical—a type of downturn that has historically lasted an average 26 months and taken 50 months to recover with «several sharp rallies» in the meantime.
Others agree: «This is not the start of a new bull market,» Morgan Stanley’s Lisa Shalett wrote in a Monday note, calling the S&P’s nearly 10% surge this month «yet another bear market rally» tied to better inflation data, before adding: «We advise caution.»
Shalett acknowledges the positive factors fueling the rally—including bullish sentiment at the highest level since December and the midterm election securing market-friendly «legislative gridlock.» But she warns economic concerns will intensify next year as the impact of rising rates becomes clear.
The «most concerning» issue facing markets is «unrealistic earnings expectations» for next year—though companies have since started lowering their forecasts to account for slower economic growth—and Morgan Stanley projects the cuts will only continue, pushing the S&P down to 3,900 points at the end of next year, 1% below the current level of 3,950.
«Don’t conflate the beginning of the end of the bear market with the end itself,» says Shalett. «Investing by looking through an economic slowdown and downshift in earnings is likely to prove dangerous.»
Last month’s inflation data, which showed consumer prices rose 7.7% (compared to a 9.1% peak in June), was a promising sign for consumers as Fed officials gauge when to hit the brakes on their aggressive tightening campaign, and stocks soared as a result. However, despite the one-month reprieve, many economists cautioned against being overly optimistic that inflation has subsided. “If this constitutes improvement, we’ve set a very low bar,” says Bankrate chief financial analyst Greg McBride, adding the “pervasiveness” of inflation “remains problematic,” particularly in shelter, food and energy prices. ”The S&P is up 10% from an October low but is still down nearly 18% this year.
What To Watch For
On Wednesday, the Fed is slated to release a summary of officials’ discussions at their policy meeting earlier this month. Analyst Tom Essaye of the Sevens Report says the meeting minutes will likely indicate the size of rate hikes will slow next month, but that the smaller hike «isn’t a positive for markets» because economists have largely expected a slowdown given the intensity of past hikes. Instead, Essaye points to the Fed’s following announcement on December 14 as «the next major» market catalyst. Goldman forecasts a half-point hike next month, followed by three quarter-point hikes next year. Next month’s announcement will shed light on what the Fed’s projecting.