Wall Street expects a soft landing as optimism erupts

Consecutive years down are very rare for the S&P 500, having only four since 1928. But when it did, the second year’s declines were always deeper than the first, with an average decline of 24 percent. The average year-end target for the S&P 500 among strategists polled by Bloomberg in December was 4,078, which would mean the index rose 6 percent, though that largely reflects the big slump that took place at the end of the year. In November, the average forecast was for a decline.

Research from the Bespoke Investment Group suggests that year-end targets typically differ by about 5 percentage points either way anyway. “We generally don’t use targets just because we think they should be used with caution,” said Paul Hickey, co-founder of Bespoke. “If there’s one thing I’ve learned from experience, it’s that when there’s such widespread agreement on anything, things don’t usually go as planned.”

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The odds of a recession are diminishing in the credit market, where the spread between the spreads of blue chip corporate swaps and their junk counterparts has narrowed by more than 100 basis points since September. Known as “compression” in market jargon, this indicates reduced fears that a severe economic downturn will leave the weakest credits vulnerable to default. Despite this, the measure remains above pre-pandemic levels.

A Bank of America measure of strategist sentiment appears to support Kelly’s view that the market consensus is overly dovish. It’s plummeted so much that it’s now signaling a return of around 16 percent over the next 12 months. The most important change that has taken place since last year, he says, is that prices have fallen, which has created opportunities “everywhere”. Index members in the S&P are trading at around 17 times forward 12-month earnings, which is their average value this century.

“One resolution I made in early 2023 is to avoid undue gloom,” Kelly wrote in a note. “A new year, like a new baby, deserves to be greeted with optimism.”

Bloomberg, staff reporter

https://www.smh.com.au/business/markets/wall-street-eyes-soft-landing-as-optimism-breaks-out-20230108-p5cb3g.html?ref=rss&utm_medium=rss&utm_source=rss_business Wall Street expects a soft landing as optimism erupts

Brian Lowry

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