By Senad Karaahmetovic
The S&P 500 closed 5.9% higher last week to mark its best week since June this year. The softer-than-expected inflation report pushed the stock market higher on hopes the Fed will commit to a pivot.
The ongoing rally, which saw the S&P 500 hit 4000 for the first time in 2 months, could continue until at least 4100, Morgan Stanley strategists said last week. On the other hand, some strategists see an opportunity to fade the rally as markets are likely yet to hit bottom.
Berenberg analysts have once again reiterated their view that it is “too early to turn bullish.” They cite a difficult macro environment where Western economies are likely to face recessions in 2023.
“We think that this is still a bear market rally and that investors should choose 'fade' over 'chase',” they said in a client note.
The analysts also warn that technicals are “no longer supportive at this point.” Various technical indicators flashed a buy signal at the end of September and the beginning of October. However, it is important to remember that the S&P 500 has already rallied 15% off its lows.
“Investors will need real progress from the “pivots” and support from valuation, macro and fundamentals to extend this rally significantly,” they added.
As Morgan Stanley's top equity strategist pointed out, the next leg lower is likely to be fueled by a reset in earnings and margin expectations in the upcoming quarter.
“Various macro signals suggest that it is too early to buy equities – this is the clear message from US manufacturing PMIs, US capacity utilization, and the US Senior Loan Officer survey. Historically, it has not paid investors to front-run recessions too aggressively; indeed, our economists still expect Western economy recessions in 2023,” Berenberg analysts concluded.