By Senad Karaahmetovic
While Credit Suisse analysts believe that the Silicon Valley Bank (NASDAQ:SIVB) collapse doesn’t pose a systemic risk, they warn that the market seems too optimistic on rates.
“We struggle to justify market expectations of a 4.4% rate in 6 months’ time (this was 5.7% just a week ago) unless overall financial conditions tighten much more (and so far they have only marginally tightened),” analysts wrote in a client note.
“The yield curve, conventional lead indicators, the stickiness of service sector inflation and abnormally large lags suggest to us that there is still a very high risk of recession by Q1 24: something that is not priced adequately into high yield spreads.”
Along these lines, analysts think that a 25bp rise by the Fed this month is quite likely. All in all, they urge the bank’s clients to stay cautious as far as U.S. equities are concerned
“We still see c10% EPS risk (owing to both a margin and revenue squeeze), the ERP is 5.1% versus a warranted 5.6% (we continue to believe fair value P/E is 16x), excess liquidity is still falling by record amounts and even now risk appetite is still discounting a strong recovery.”
If indeed the Fed cuts in June, as the market is pricing in now, Analysts remind investors that “the market has always been down sharply 6 months after the first rate cut.”
Finally, they advised investors to be underweight non-financial cyclicals.