More volatility, possible correction ahead for global stock markets

© Reuters. FILE PHOTO: A trader works on the trading floor at the New York Stock Exchange (NYSE) in New York City, U.S., January 27, 2023. REUTERS/Andrew Kelly

By Hari Kishan

BENGALURU (Reuters) - Volatility in global stock markets is not yet over, as more investors reckon interest rates will likely stay higher for longer, according to a Reuters poll of equity analysts, a slight majority of whom expected a correction within three months.

Global stocks fell nearly 20% in 2022 and would have fared worse if it were not for a late-year rally on hopes falling inflation and weaker growth would force central banks to halt an historic rate-hiking run and swiftly start cutting within months.

However, sticky inflation, strong labour markets and resilient economic growth so far this year have dashed those rate cut expectations, sending bond yields and market interest rate pricing sharply higher.

Stocks have rallied about 20% in recent months and some strategists say the market has gone too far.

"Valuations are stretched across equity markets after the rally year-to-date. The recovery in earnings would have to be quite strong to justify these levels, given that support from falling real rates should remain limited on the back of sticky inflation levels," said Wolf von Rotberg, equity strategist at Bank J. Safra Sarasin.

The Feb. 10-22 Reuters poll of more than 150 strategists, analysts and fund managers covering 17 global stock indices, found 56% were expecting a correction in their local market in the next three months.

A total of 48 of 86 respondents said the chances of a correction were either high or very high. The remaining 38 said low or very low.

The poll showed a majority of indices surveyed would fall short, or just about recoup their 2022 losses by the end of the year.

While company earnings will need to be strong, much depends on whether the fall in inflation accelerates toward major central banks' targets by year-end.

Most analysts acknowledge this ideal scenario is unlikely.

"If resilient growth/soft-landing/no-landing is the central outlook it is easier to explain equity market resilience with this 'Goldilocks' perspective," noted Alan Ruskin, chief international strategist at Deutsche Bank (ETR:DBKGn).

"If however this stronger growth drives inflation expectations, or inflation is higher than expected, then the prospect of the Fed having to do more/too much, in a world of structural change, adds to the risk of policy error, leaving equities vulnerable."

Reuters Poll - S&P 500 vs market-implied fed funds rate https://fingfx.thomsonreuters.com/gfx/polling/gkvlwlwjypb/Reuters%20Poll%20-%20Standard%20and%20Poor's%20500%20vs%20Market-implied%20fed%20funds%20rate.PNG

Nearly 60% of respondents, 48 of 83, said their end-2023 forecasts were not even partly dependent on central banks cutting interest rates within 12 months, suggesting the higher for longer narrative has taken hold. The remaining 35 said their outlook was still dependent on central bank cuts.

A stronger 70% majority of analysts, 57 of 82, expected value stocks to outperform growth stocks this year.

Reuters Poll - U.S. S&P 500 - Growth vs Value Indices https://fingfx.thomsonreuters.com/gfx/polling/myvmoaojrvr/Reuters%20Poll%20-%20U.S.%20Standard%20and%20Poor's%20500%20-%20Growth%20vs%20Value%20Indices.PNG

Wall Street's benchmark S&P 500 index was expected to advance about 5% from Tuesday's close by year-end. The S&P 500 was predicted to end 2023 at 4,200 points, a 9.4% increase for the calendar year. This forecast target was unchanged from a November 2022 poll.

Potential downward earnings revisions and uncertainty over the outlook for monetary policy led analysts and strategists to take a cautious view on European shares this year, with a key benchmark seen falling slightly in 2023.

India's equity market will rise less this year than thought a few months ago mainly due to expectations of higher interest rates, but most analysts also saw low chances of a correction in the near-term.

"While we believe that Q1 can initially stay robust, a fundamental confirmation for the next leg of the rally might end up lacking," noted Mislav Matejka, head of global and European equity strategy at JP Morgan.

Latam stock markets will have a relatively better year with Mexican stocks expected to advance 6.7% to 57,500 points and Brazil's Bovespa stock index predicted to gain 14.5% to 125,000 points by year-end.

(Other stories from the Reuters Q1 global stock markets poll package:)