Investors seem to be humming the chorus of Bob Marley’s “Three Little Birds” lately. Don’t worry about a thing ‘Cause every little thing gonna be all right.
Wall Street has shrugged off concerns about tariffs and trade, interest rates remaining higher than many consumers (and President Donald Trump) would like, the prospect for slowing earnings and economic growth and, new worries about higher oil prices and greater geopolitical tension following the U.S. strike on Iranian nuclear facilities over the weekend.
Stocks rose Monday but trading was volatile. Still, the market, after getting hit hard in early April by Trump’s tariff war, has enjoyed an impressive surge since then. The Dow is now essentially flat for the year while the S&P 500 and Nasdaq are both in positive territory and inching back toward record high levels.
Does the rally make sense? Or are investors now being too glib and dismissing a growing cavalcade of risks? It’s increasingly looking like the latter scenario, especially when you consider that the S&P 500 is trading at nearly 23 times earnings estimates for this year, above its 10-year average forward price-to-earnings ratio of about 20.
“Not to sound like a Debbie Downer, but this is the time for investors to assess vulnerability in their portfolios,” Kristina Hooper, chief market strategist with Man Group, told Barron’s.
“Look at U.S. equities. There is a risk of a significant selloff. The stock market is priced for perfection,” Hooper added, noting that even as earnings estimates have come down a bit lately, stocks have rebounded in the past few months.
Stephen Dover, chief market strategist with Franklin Templeton, adds that the market seems to be once again buying into the idea of U.S. exceptionalism, even though a weaker dollar and the prospect of more stimulus (particularly military spending) from Germany and other European nations should boost shares of foreign companies.
“Many investors are still underweight international stocks and overweight American stocks, particularly the Magnificent Seven,” Dover told Barron’s, adding that “Europe makes more sense tactically” than the U.S. market.
Others note that investors are being cavalier in assuming that the situation between Iran and Israel will cool off soon, particularly after the U.S. stepped in with the bombing of Iranian nuclear sites.
“It seems markets are waiting until some sort of resolution in the Middle East,” said Tavis McCourt, an institutional equity strategist with Raymond James in a report Monday. McCourt added that “anxiety” about the possibility of oil shipments being halted in the Strait of Hormuz is a major concern.
“Increased escalation likely means short term higher oil…and mentions of ‘stagflation’ in the media, which can’t help equities,” McCourt wrote.
Wall Street shouldn’t assume that there will be a quick resolution to the tension in the Middle East. Nor should it dismiss the potential for inflation remaining sticker than the Fed would like for the foreseeable future.
“Tariffs here to stay as fixture of this administration’s policies,” Jordan Rizzuto, chief investment officer and managing partner with GammaRoad Capital Partners, told Barron’s. “We’re going to have higher prices. That is depressive to economic growth but also inflationary.”
Rizzuto added that consumer discretionary stocks continue to lag the broader market as well, despite a recent rebound. That isn’t a good sign considering that many market bulls continue to cling the notion that the American consumer will keep spending even when faced with difficult times.
Simply put, the recent rally may be close to running its course. But some still see hopeful signs.
Chris Hyzy, chief investment officer at Merrill and Bank of America Private Bank, acknowledged that there is “a dark cloud hanging over the market and a lot of negativity.” But he thinks profit growth could rejuvenate next year, once again led by big tech companies. The Fed could also come to the rescue later this year with more rate cuts.
So all isn’t lost for the bulls. It just may be a bumpy ride as economic and geopolitical fears start to pick up.
Write to Paul R. La Monica at [email protected]
