UBS's Haefele Sees Three Things Needed for More Stock Gains

(Bloomberg) -- Stocks kicked off the second quarter with a roaring start, but UBS Group AG says the market may need help to keep going.

“For meaningful further upside from here, we would need to see indications that the growth stabilization is translating into an upswing, profit growth is continuing, and a flat yield curve is not translating into weaker bank lending,” UBS Wealth Management’s Global Chief Investment Officer Mark Haefele wrote in a note April 8.

UBS's Haefele Sees Three Things Needed for More Stock Gains

The torrid year-to-date rally in stocks has continued in the second quarter, even after a setback Tuesday. The MSCI All-Country World Index is up 1.8 percent this month, while the S&P 500 Index has advanced 1.6 percent. To Haefele, that signifies that investors are already expecting “a relatively benign scenario” and further increases may not be as easy to come by.

UBS's Haefele Sees Three Things Needed for More Stock Gains

Equities have rallied strongly since bottoming on Dec. 24, as concerns about U.S.-China trade tensions eased, the Federal Reserve turned more dovish and China took policy steps to combat economic weakness. Volatility across assets is near historic lows. Amid that environment, the MSCI ACWI is about 6 percent off its January 2018 record, and the S&P 500 is about 2 percent below its September peak.

Goldman Sachs Group Inc. agreed with the idea that economic performance is coming back to center stage.

“Better global growth needs to take over as a driver of risk appetite,” strategists including Christian Mueller-Glissmann and Alessio Rizzi wrote in a strategy paper on April 4. Though they cautioned, “the eventual recovery might disappoint and there is potential for further shocks from politics and rates.”

Sundial Capital Research found some amount of caution to be justified. The firm crunched numbers related to stock gains and profit growth for U.S. companies, analyzing more than 15 instances when the S&P 500 started first-quarter earnings season at or near a 100-day high to address concerns about whether shares could rally from here.

“There does seem to be some support for the worries, but it’s not very strong,” Sundial founder Jason Goepfert wrote in a note April 8. “The S&P has struggled a bit holding its gains when it’s already been rallying into earning season, and it has also struggled when earnings were forecast to slow from impressive growth to either less-impressive or outright negative year-over-year growth.”

Goepfert’s analysis found that the S&P 500 on average was down 0.3 percent after starting first-quarter earnings season at or near that 100-day high, though after six months that figure turned to a gain of 4.3 percent. One year later, on average, the benchmark was up more than 11 percent.

“The ‘pain trade’ might still be up, which can support risk appetite further,” Goldman’s Mueller-Glissmann and Rizzi wrote. “But without a sustained pick-up in global PMIs in the coming months, we believe risk appetite is unlikely to turn positive and remains vulnerable to shocks.”

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