Q3: Major Test for US Stocks Looms

After a strong upward attack led by tech giants in the first half of the year, there were once few analysts on Wall Street who were bearish on U.S. stocks. However, some cautious views have begun to emerge recently.

Morgan Stanley's star strategist, Michael Wilson, said that as uncertainties surrounding U.S. politics, corporate earnings, and Federal Reserve policy begin to put pressure on the market, investors should start preparing for a stock market correction. "There is a high possibility of a 10% correction from now until the election, as uncertainties may prevail."

A reversal of stance once again

This Morgan Stanley strategist, known for his bearish views, changed his stance in the first half of the year, raising the target for the S&P 500 index and predicting that the index would reach 5,400 points by the middle of next year.

Wilson said in a recently aired program that this year, stock investors have managed to ignore various risks. In response to the lukewarm earnings growth shown by most companies, their solution has been to bet on a few high-quality growth stocks that have seen a surge in profits over the past year. Although this strategy has generally worked, investors will eventually be forced to consider the possibility that the economic dynamics that have recently helped support the stock market, "bad news is good news," may ultimately backfire on the stock market.

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According to the schedule, the new earnings season will kick off this Friday. Driven by a few large stocks ready to benefit from emerging artificial intelligence technology, the S&P 500 index has risen by 16% so far in 2024.

According to data from Bank of America, only 24% of the stocks in the S&P 500 index outperformed the index in the first half of the year, which is the third lowest since 1986.

Wilson said that the third quarter will be "turbulent."

In the coming weeks, the market will focus on whether profit growth in other industries begins to catch up with the two leaders, information technology and communication services, to promote the expansion of market breadth. An index from Citigroup shows that as of the second fiscal quarter, the number of analysts raising earnings forecasts exceeded those lowering them. At the same time, expectations for the 12-month forward yield are at an all-time high. "Given the high implied growth expectations, the market may need to see upward revisions in forecasts, as well as revenue growth that is stronger than expected, driven by solid execution, in order to maintain the recent uptrend or to rise further on this basis," Citigroup strategist Scott Chronert wrote in the report. "The concern is that, although the fundamental trends are positive and the consensus expectations can be achieved, valuations indicate that buyers will demand more."

Art Hogan, Chief Market Strategist at asset management firm B Riley Wealth, believes that if looking for a way to involve more people in this year's rebound, then the second quarter earnings season is likely to be the beginning. He expects the expected price-to-earnings ratio of the S&P 500 index to be about 21 times, but if the top ten stocks by market value are excluded, the average price-to-earnings ratio of the rest of the index will drop to 16.5.Wells Fargo Research stated in a report sent to journalists that a greater balance in profitability could lead to broader market participation in the coming quarters. Investors are advised to reduce their holdings in the technology sector and take advantage of the valuation benefits in the energy, healthcare, industrial, and materials industries.

The Federal Reserve

Uncertainty surrounding the prospects of monetary policy and the upcoming election could also serve as catalysts for market declines in the coming months. Wilson believes that there is only about a 25% chance that the S&P 500 index will reach or exceed its current level this year.

The latest non-farm report has made many institutions feel the potential danger. Bob Schwartz, a senior economist at Oxford Economics, previously stated in an interview with First Financial Daily reporters that the path of monetary policy is not clear at present, but the Federal Reserve needs to act cautiously. Historically, if one waits for specific evidence of problems in the labor market, it may be too late.

Kevin Gordon, a senior investment strategist at Charles Schwab, believes that as the unemployment rate breaks through 4%, its rise needs to be closely monitored. "Once you start seeing it climb, it's hard to put it back in the bottle."

A possible scenario is that the Federal Reserve will eventually lower interest rates to help an ailing economy, rather than cutting rates to ensure a soft landing. Matt Stucky, Chief Investment Portfolio Manager at Northwestern Mutual Wealth Management Company, analyzed unfavorable factors such as weak economic data, rising consumer delinquency rates, and the Federal Reserve's policy interest rates remaining high, and believes that investors should prepare their portfolios for a mild recession over the next 12 to 18 months. "We believe that risks are rising," he said.