Maverick Wall Street optimists forecast soft landing

Bolstered case

“Optimists and pessimists agree that 2022 was a terrible year for stocks and bonds but it doesn’t go on forever,” Yardeni said. “The market has responded to the fact that inflation has turned out to be more persistent and the Fed to be more aggressive.”

Economic data published on Friday bolstered the case for optimism. Another strong US jobs report showed hiring growth exceeded expectations as wage gains slowed more than anticipated. Euro-area inflation returned to single digits for the first time since August, fuelling hopes that the bloc’s worst-yet spike in consumer prices has peaked. 

Consecutive down years are very rare for the S&P 500, having taken place just four times since 1928. Yet when they have occurred, drops in the second year have always been deeper than in the first, with an average decline of 24%. The average year-end target for the S&P 500 among strategists surveyed by Bloomberg in December was 4,078, which would imply a 6% gain for the index, though that largely reflects the big slump at the end of the year. In November, the average forecast was for a decline. 

Research from Bespoke Investment Group suggests year-end targets are usually about five percentage points off in either direction anyway. “We don’t generally do targets, just because we think they should be taken with a grain of salt,” said Bespoke cofounder Paul Hickey. “If there’s one thing I’ve learnt through experience, it’s that when there is such widespread agreement on anything, things don’t usually play out as planned.”

Too pessimistic

Recession odds are ebbing in the credit market, where the gap between default swap spreads of high-grade companies and their junk counterparts has fallen more than 100 basis points since September. Known as “compression” in market parlance, it points to less fear that a sharp economic downturn will leave the weakest credits vulnerable to default. Yet the measure remains above prepandemic levels.

A Bank of America measure of strategists’ sentiment seems to back up Kelly’s view that market consensus is too pessimistic. It has tumbled so much that it is now signalling a return of about 16% in the next 12 months. The most important change that has taken place since last year, he says, is that prices have fallen, creating opportunities “all over the place”. Index members in the S&P are trading at about 17 times projected 12-month profits, in line with its average reading this century. 

“One resolution I’ve made at the start of 2023 is to avoid unreasonable gloom,” Kelly wrote in a note. “A new year, like a new baby, deserves to be greeted with optimism.”

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