Strategists Warn Stocks Haven't Bottomed Yet

(Bloomberg) -- While the stock market seemed to be settling down after Wednesday’s bloodletting, some Wall Street strategists warned that it may be too early to buy the dip.

To be sure, nobody expects this month’s rout to mark the beginning of an end to the bull market that by some measures has become the longest in history. The economy and corporate America are still on solid footing, they say.

But as Treasury yields surged to a seven-year high, trade tensions flared up again with China and a growing number of companies blamed margin pressure for profit shortfalls, it’s likely to take some time for the market to find the bottom.

Strategists Warn Stocks Haven't Bottomed Yet

The S&P 500 fell 1.2 percent as of 11:18 a.m. in New York, extending declines to a sixth straight day. On Wednesday, the benchmark slumped the most in eight months, wiping out more than $800 billion from equity values.

Down almost 6 percent since the September high, the S&P 500 is now mired in its third major retreat of the year. The index tumbled 10 percent in February and lost 7.4 percent two months later.

Below are some highlights of what strategists say about the market’s outlook.

Lori Calvasina, RBC Capital Markets

We remain concerned about U.S. equities in the short-term due to worries about the upcoming reporting season and new evidence of extreme crowding in the futures market, and are not currently buyers on the recent dip.

Tony Dwyer, Canaccord Genuity

Tactical indicators turning positive, but can get a bit more extreme. We believe the correction was underway, and we have been waiting for our four key tactical indicators to reach levels that would suggest a bottom should be near, and suggest a more attractive intermediate-term entry point as long as our positive fundamental thesis in place. Again, our trusty market indicators are not a “bottom tick” signal and can all get more extreme on follow through weakness.

Tobias Levkovich, Citigroup

Third quarter EPS forecasts looked risky as the negative-to-positive pre-announcement ratio picked up for the first time since 1Q16 and consensus estimated 3Q18 earnings growth slipped. Higher Treasury bond yields were expected (given wage pressures) and the resultant share price turmoil is reminiscent of early February’s pullback.

Noah Weisberger, AB Bernstein

The proximate concern for stocks has been the re-rating in the bond market, itself likely due to firm economic growth, not a risk of overheating or an intensification of inflation risks. While, in our view, it is still premature to expect a full-on bear market and economic downturn in the near term, the market is on the precipice of a rate-induced “drawdown.” Drawdowns tend to be sharp and short-lived affairs, though a full recovery often takes some time.

Michael Purves, Weeden & Co.

Indications of increased Treasury stability will allow the VIX curve to de-invert and begin the process of dip buying. In the immediate term, further choppiness seems like a reasonable expectation given the suddenness of the move.

Mike Wilson, Morgan Stanley

We see margin compression coming as macro cost pressures rise and demand slows. Margin downside has negative implications for U.S. equity benchmarks as the rate of change in operating margins is now strongly correlated with stock prices - a trend we expect to continue.
Many investors we speak to believe elevated tech margins will remain resilient, keeping margins stable for the overall market. We disagree and argue that Tech is more cyclical than many appreciate.

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