This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Thursday, April 8, 2021
Growth is soaring and strategists keep getting less bullish on the stock market.
As investors await the start of first quarter earnings season, a clear consensus has emerged on what the coming months might have in store for markets — muted returns.
On Wednesday morning, we highlighted recent research tying potentially lackluster periods of forward returns to soaring economic activity readings.
And also hitting the Morning Brief's inbox on Wednesday is work from Brian Belski and the strategy team over at BMO cautioning investors to prepare for potentially more muted returns in the market in the months ahead. Even while the firm sees risks to this forecast as residing to the upside, in keeping with how most of the pandemic recession, recovery, and market reaction has played out.
"The price strength exhibited in US equities [in Q1] left the S&P 500 just 3.1% off our 2021 year-end price target with risk to our target now slanted to the upside," BMO writes. "That being said, as we have discussed previously, we believe investors should be prepared for a second half of the year that will likely be weaker in terms of price gains compared to 1H as the reopening and cyclicals trade matures and investors start to digest the implications of an EPS-driven environment. Ultimately, however, we see the S&P 500 ending 2021 at our price target of 4,200."
On Wednesday, the S&P 500 closed at 4,079.
The Globe and Mail's Scott Barlow on Wednesday also flagged work out of Tobias Levkovich over at Citi this week, who writes that the market is starting to take a "1999 perspective" right now.
"There's a 1999 perspective being noted with pressure for fund managers to participate in rising share prices even if there's also a recognition that it could end badly," Levkovich writes. "With an expected Fed tapering later this year, some slippage in forward earnings guidance and the likelihood of alarming inflation data on the come (even if transitory), the upside reward versus downside potential seems skewed toward taking cautious stances."
And we highlight this work — which closely echoes what was cited in the Morning Brief on Wednesday — for two key reasons.
The first, again, is because of how fast consensus has come to the same conclusion. And the consensus view says, basically: everything the market discounted in 2020 is happening now, and so there's no obvious positive catalyst for markets over the next few quarters.
And the second is that when Belski and his team at BMO, who were early on calling for a new bull market in the spring of 2020 and have persistently reiterated that long-term view, signal any caution in the market, we take note. It was only a few days ago that BMO sent around a report highlighting that when the S&P 500 gains more than 30% in the first year of a bull market — which just happened and then some — the market gains, on average, another 17.1% in year two of the bull run.
If history ends up serving as a guide in 2021, then the market will exceed BMO's year-end price target of 4,200. And so we see why risks remain to the upside for the firm's present outlook.
But as has been the case at several points over the last year's rally, what might keep driving stocks higher appears hard to pin down right now.
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