Wall Street Strategists See Rotation Powering Stocks to Records
(Bloomberg) -- Equity strategists are as bullish as ever, despite all the nervousness among investors about sky-high valuations and rising rates.
Strategists from Goldman Sachs Group Inc. and Credit Suisse Group AG are counting on more gains from equities as investors rotate out of bonds and cash, and economic growth accelerates. Even if some stocks dip because of higher rates, there will be strong rallies in other sectors, according to Abby Joseph Cohen, senior investment strategist at Goldman Sachs.
“We are seeing this very significant rotation,” Cohen said in an interview on Bloomberg TV. “We are seeing some movement now in those sectors that do better when we come out of lockdown, and the good news on the vaccine will be helpful.”
Goldman is expecting the S&P 500 to end the year at 4,300, implying a 13% increase from current levels and a new all-time high. The median S&P 500 forecast from a Bloomberg survey is 4,100 versus the index’s current level of 3,850.
According to Credit Suisse’s Andrew Garthwaite, this is the beginning of a bonds-to-equity switch. Stocks and bond yields were positively correlated in February, and when that’s happened in the past, equity prices were up an average of 6% six months later, he wrote in a note on Monday.
“We worry when US 10-year bond yields rise above 2%, inflation expectations go above 3% or there is a large rise in the TIPS yield,” wrote Credit Suisse strategists. For now, all of those conditions are some ways off. The bank is sticking to a year-end forecast for the MSCI All-Country World Index Ex-U.S. of 375, which implies a 13% gain from today’s levels.
Goldman Sachs makes a similar case in favor of equities. “History shows that equity funds generally experience inflows when real rates are rising,” strategists led by David Kostin said in a report on Friday.
The bank predicted households will be the biggest source of U.S. equity demand, estimating purchases of $350 billion this year. Corporate buying will also be strong at $300 billion amid a resurgence of stock buybacks, Goldman Sachs said.
At JPMorgan Chase & Co., the rotation out of technology and into cyclicals isn’t over yet. Airlines, hotels and auto suppliers are attractive, and investors should consider shorting online retail and technology, said strategist Mislav Matejka.
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