(Bloomberg) -- The bear market that wiped out as much as $12 trillion in US equity values is over, according to Chris Harvey at Wells Fargo (NYSE:WFC) & Co.
The head of equity strategy says the recent pullback in the yield of investment-grade corporate bonds has been “inconsistent” with the prevailing fear that the S&P 500 will renew a selloff and take out its October lows. Moreover, healthy balance-sheets at both the corporate and consumer level suggest a subdued level of systemic risk, meaning the catalyst for an extended market downturn is largely absent, he adds.
“Bear markets often end when we see sharp tightenings and healthy issuance similar to what we have experienced over the last several months,” Harvey wrote in a note Monday. “When bear markets go ‘next level’ spreads widen, not tighten, as they have today. IG spreads support our views on systemic risk.”
Harvey joined a minority on Wall Street, including Ed Yardeni, in calling an end to 2022’s bear market. In a Bloomberg MLIV Pulse survey conducted at the end of January, roughly 70% of the respondents said the stock market has yet to hit the bottom after the S&P 500 sank 25% from peak to trough.
While Yardeni viewed the equity rally from October as the start of a new bull, Harvey is less sanguine. He’s sticking to his year-end target of 4,200 for the S&P 500, a level that’s only 2.7% above Friday’s close.
The way Harvey sees it, while the selloff has run its course, the ingredients for a sustained recovery — a continued expansion in stock multiples and corporate earnings, are missing, at least for now.
At 18.3 times profits, the S&P 500’s P/E ratio already exceeded its 10-year average. At the same time, earnings sentiment is souring. Analysts have cut their 2023 estimates for big American firms by 5% to $220.70 a share since the end of October, data compiled by Bloomberg Intelligence show.
The bull is “stuck in traffic,” Harvey wrote.
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