(Times News Express) The index was on track for its worst week since June at one point. In a relatively low-volatility market that’s been backed by Federal Reserve policy for more than a year, such a move can feel scary.
But according to three of Wall Street’s most renowned equity strategists, the pain may just be getting started.
Over the past couple of weeks, Bank of America’s Savita Subramanian, Morgan Stanley’s Mike Wilson, and Stifel’s Barry Bannister – all the top US equity strategists at their respective firms – have issued specific correction calls. Each of their views is laid out below.
Savita Subramanian – Bank of America
Subramanian, who is tied with Bannister for the most bearish top strategist on Wall Street with a 2021 S&P 500 price target of 3,800, issued the most severe call. She said that the S&P 500 is due for about a 15% correction, putting stocks close to bear market territory. The index closed at 4,441.67 on Friday.
Subramanian’s argument rests on the fact that she expects 10-year Treasury yields to rise to 1.9% by year end from their current level of 1.26%. The more attractive risk-free yield will pull away investors from riskier stocks, she argues. In other words, investors will have a increasingly enticing alternative to stocks the more rates rise.
Muted corporate earnings due to inflation and the economy slowing down are also risks, she said. Plus, stocks are overvalued by a plethora of measures – laid out below – signaling weak returns could be ahead.
Mike Wilson – Morgan Stanley
When Mike Wilson makes a correction call, investors would do well to listen. Wilson has been a master of correction calls over the last year-plus (last year he broke down for Insider his process for making such forecasts). In 2020 he accurately called two pullbacks in stocks running up to the 2020 election.
In a Monday podcast, Wilson again issued a call for a “greater than” 10% pullback in the S&P 500. He cited the prospect of the Fed tapering their asset purchases and what that would mean for valuations, as well as slowing earnings growth.
“The combination of lower-than-consensus earnings next year and lower valuation leads us to believe there is very little upside, if any, to major US equity indices over the next few quarters,” Wilson said. “In fact, our S&P 500 target price for year-end is 4,000, which is 10% below current levels. Between here and there, we expect a greater than 10% correction.”
Barry Bannister – Stifel
In a note to clients last week, Bannister called for a 10% correction in stocks. He pointed to a list of signs that paint a dim picture for stocks.
The first is that economic activity, measured by manufacturing output, is due to slow down. Second, he sees the global money supply shrinking as central banks begin to take their foot off the stimulus gas pedal. This typically is a drag on stock performance.
Third, like Wilson and Subramanian, Bannister sees corporate earnings beginning to drag. Finally, rising bond yields and the US dollar growing stronger threaten to derail stocks’ upward path.
The bigger picture
Again, Subramanian and Bannister are the most bearish strategists on Wall Street, each with end-of-year S&P 500 price targets of 3,800. Wilson isn’t much more bullish with his target of 4,000.
Those targets fall below the still-bearish average Wall Street target of about 4,240, according to Bloomberg data. They are also well below some of their more bullish peers, like Goldman Sachs’ David Kostin or Credit Suisse’s Jonathan Golub, who have price targets of 4,700 and 4,600, respectively.
But there’s nuance to even the most bullish calls. Goldman Sachs, for example, said in recent weeks that the S&P 500 could correct almost 20% if 10-year Treasury yield rise in a quick and substantial way.
Big investors are also worried about the ongoing economic recovery, a Bank of America survey showed this week.
It’s been smooth sailing for stocks in 2021. But they will have to try to navigate a clear path through multiple storms brewing on the horizon, from rising interest rates and Fed tapering to the Delta variant of COVID-19 and slowing economic growth.
Fairly broad consensus on Wall Street seems to be that stocks have hit a ceiling for the time being. Time will tell if that’s the case.
