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 not for a late-year rally on hopes that falling inflation and weaker growth would force central banks to halt a historic rate-hiking run and swiftly start cutting within months.
However, this year’s sticky inflation, strong labor markets, and resilient economic growth have dashed those rate-cut expectations, sending bond yields and market interest rate pricing sharply higher.
Stocks have rallied about 20% recently, 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.
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 that most indices surveyed would fall short or 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.
“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.”
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 more extended narrative has taken hold. The remaining 35 said their outlook was still dependent on central bank cuts.
A more substantial 70% majority of analysts, 57 of 82, expected value stocks to outperform growth stocks this year.
Wall Street’s benchmark S&P 500 index (.SPX) 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 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.
According to a recent Reuters poll of equity analysts, the volatility in global stock markets is expected to continue, as more investors believe that interest rates will remain higher for longer. A slight majority of those polled predicted a correction within the next three months.
Global stocks experienced a decline of nearly 20% in 2022, and without the late-year rally, the situation could have been even worse. The hope was that falling inflation and weaker growth would cause central banks to halt their historic rate-hiking run and start cutting rates swiftly within months.
However, sticky inflation, strong labor markets, and resilient economic growth have dashed those rate-cut expectations, leading to an increase in bond yields and market interest rate pricing.
Some strategists say that the market has gone too far, and stock prices have rallied about 20% in recent months. “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.
In a Reuters poll of more than 150 strategists, analysts, and fund managers covering 17 global stock indices, 56% of respondents expected 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.
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.
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.
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.
In conclusion, the volatility in global stock markets is expected to continue, as investors believe that interest rates will remain higher for longer. While some analysts see value stocks outperforming growth stocks, most believe that the higher-for-longer narrative has taken hold.
