Wall Street Is Getting Even More Bullish on Stocks

Stocks

Summary:

Nearly five months through 2024, the major stock indexes are near record highs...

Wall Street doesn't think this rally is over, either, as the outlooks for earnings and economic growth have steadily risen throughout the year.

In the past two weeks, three equity strategists tracked by Yahoo Finance have boosted their year-end targets for the S&P 500. The median target on Wall Street for the benchmark index now sits at 5,250, up from the median target of 4,850 on Dec. 30, per Bloomberg data. The Street-high target has moved up to 5,600 from 5,200 to start the year too.

"The current environment is basically what the bulls were hoping for, and they are getting it," Bank of America US and Canada equity strategist Ohsung Kwon told Yahoo Finance. "It's basically a soft landing."

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Kwon explained that while inflation data has come in hotter than expected to start the year, it still hasn't indicated that price increases are reaccelerating. Meanwhile, other data has signaled a slowing but strong economy, easing fears that red-hot growth could spark another inflation spike. In essence, this has fueled the soft landing narrative Wall Street bulls hoped for entering the year, per Kwon.

BMO Capital Markets chief investment strategist Brian Belski noted that markets have made an important shift as this data has come in. Markets are now pricing in about two rate cuts this year, down from a peak of nearly seven to start the year, per Bloomberg data. This aligns with the Fed's most recent projections, in which officials favored two or three rate cuts this year.

"It has become clear to us that we underestimated the strength of the market momentum, particularly considering that investor expectations and Fed policy guidance have become essentially aligned vs. the significant disconnect that existed at the beginning of the year," Belski wrote in a research note on May 15.

In that note, Belski boosted his year-end target from 5,100 to 5,600 — a new high on Wall Street. He noted that with the level of strength seen in stocks to start the year, history says further gains are likely ahead. In years where the S&P 500 rallies more than 8% in the first five months of the year, as it just did, the index gains more than 7% to finish the year 70% of the time, per Belski's analysis of historical data.

Belski and other strategists who boosted their outlook for stocks this year did warn, however, that stocks' move upward likely won't come without more pullbacks. Belski noted that April's 5% retreat was meager in comparison to the usual more than 9% seen in the second year of bull markets.

But given the rally in stocks to start the year, "should a more severe pullback happen, it will likely occur at higher index levels than we previously anticipated," Belski stated, providing a higher landing spot for the S&P 500 after a rebound.

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'Talking bullish'

Entering the year, bullish strategists on Wall Street were adamant that a key to the market rally this year would be a continued rebound in corporate earnings. And thus far, that has played out. Earnings grew 6% in the first quarter of 2024, the highest rate of growth seen in nearly two years.

Thus far, what's driving earnings hasn't changed significantly. Tech earnings, like Nvidia's blowout quarter from last Wednesday, are driving the lion's share of earnings growth in the S&P 500. But strategists think the seeds are still in place for a broadening to end 2024.

Kwon noted that the first stage of the AI cycle has already been happening with earnings growing at companies like Nvidia (NVDA) as tech giants like Alphabet (GOOG, GOOGL), Amazon (AMZN), and Microsoft (MSFT) invest in the growing technology. But the rewards are starting to expand with recent rallies in sectors like Utilities and Energy.

"We don't think it's just about Nvidia anymore," Kwon said. "Things are broadening out. ... To power, commodities, utilities, things like that."

Kwon noted in a recent research note that Nvidia drove 37% of the S&P 500's earnings growth over the past month. In the next 12 months, it's expected to represent just 9%.

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Deutsche Bank's chief equity strategist Binky Chadha also believes other areas of the S&P 500 are set to contribute to robust earnings growth through the end of the year. He recently boosted his S&P 500 target to 5,500 from a prior target of 5,100 but told Yahoo Finance that target has clear "risks to the upside."

For one, Chadha notes that while people are "talking bullish," equity positioning hasn't shifted much in the past three months. Deutsche Bank's measure of positioning shows investors are "overweight" equities but not to the "extreme" levels seen in 2021 and 2018.

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To Chadha, this shows there could be more room to run for stocks, particularly given that he feels consensus isn't currently pricing in outperformance for the US economy.

Chadha highlights that expectations for the US economy have really just shifted from an incoming recession to at or below normal trend growth. If that consensus continues to move higher, and the US economy once again grows more than expected this year amid what some believe could be a productivity boom for the US labor force, it's not hard to see the S&P 500 hitting 6,000, per Chadha.

"We've come a long way, but we don't seem to have gone all the way," Chadha said.

Source: Yahoo Finance

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Samantha Luan

Economic

Data from the Australian Bureau of Statistics (ABS) on Tuesday showed retail sales rose 0.1% in April from March, when they fell 0.4%. Analysts had looked for a rise of 0.2%.

"Since the start of 2024, trend retail turnover has been flat as cautious consumers reduce their discretionary spending," said Ben Dorber, ABS head of retail statistics.

"Looking across the past two months, we see weak underlying spending in most parts of the retail industry."

April's sales of A$35.7 billion ($23.78 billion) were up a sluggish 1.3% from a year earlier.

That growth is particularly miserly given Australia's population is expanding by more than 2% a year. Sales volumes per capita have fallen for seven straight quarters, the type of weakness usually only seen in recessions.

This is partly due to higher mortgage rates and rising rents, which are eating into spending power.

Costs for services not covered by the retail data have also been rising much faster than goods prices, including everything from insurance, to education, health and electricity.

The stubbornness of service inflation is a major reason the Reserve Bank of Australia (RBA) is considered unlikely to lower borrowing costs at all this year.

Futures imply around a 30% chance of a quarter point cut in the 4.35% cash rate by December, and an easing is not fully priced in until May 2025.

Figures for April consumer prices are due on Wednesday and analysts expect only a small dip in annual inflation to 3.4%, from 3.5% in March.

Many households will get a boost to income from July when cuts to income taxes are delivered, but surveys suggest workers intend to save the majority of the windfall.

"The upshot is that consumption growth will probably remain weak into the second half of the year, which should help to lower inflation further," said Marcel Thieliant, head of Asia-Pacific economics at Capital Economics.

"While we expect the RBA to only start cutting interest rates at the beginning of next year, the prolonged weakness in consumption opens the door for an earlier rate cut."

Source:Reuters

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Alex

Stocks

Regional markets saw some strength on Monday as China announced more stimulus measures, this time aimed at the local chipmaking industry. Chinese technology stocks saw extended gains on Tuesday on optimism over more stimulus.

But broader markets were largely depressed, as the U.S. Memorial Day holiday also made for few overnight cues.

Hong Kong boosted by tech rally, China flat

Hong Kong’s Hang Seng index was a standout performer in Asia, rising 0.9% after strong gains in the prior session. In contrast, China’s benchmark Shanghai Shenzhen CSI 300 and Shanghai Composite indexes moved in a flat-to-low range.

Chinese tech stocks were cheered by the government announcing a new $47 billion fund aimed at supporting the local chipmaking industry, especially amid tight U.S. sanctions and tariffs against the country.

Some positive earnings also boosted sentiment. Alibaba Health Information Technology Ltd , which is a separately listed unit of the e-commerce giant, surged over 12% after clocking a strong jump in its profit for the year to March 31. The stock was also the biggest boost to the Hang Seng.

Still, sentiment towards broader Chinese markets appeared to be cooling as investors waited to see just how the country will execute and fund its recent swathe of stimulus measures.

Anticipation of key Chinese purchasing managers index data later this week also kept investors on edge.

Asian stocks subdued ahead of inflation cues

Broader Asian markets moved in a flat-to-low range before a string of key inflation readings from the region, and the U.S., due later in the week.

Australia’s ASX 200 fell 0.2% as data showed retail sales grew less than expected in April, amid pressure from inflation and high rates. A monthly consumer price index inflation reading is also due on Wednesday.

Japan’s Nikkei 225 index fell 0.4%, while the broader TOPIX lost 0.1%. Inflation data from Japan’s capital is due later this week, and is likely to factor into the Bank of Japan’s outlook on interest rates.

South Korea’s KOSPI traded sideways, while futures for India’s Nifty 50 index pointed to a flat open, after the index briefly hit record highs in the prior session.

Beyond Asia, key CPI readings from the eurozone are also due this week. But the biggest point of focus is PCE price index data- which is the U.S. Federal Reserve’s preferred inflation gauge.

The reading is due on Friday and is likely to factor into the outlook for rate cuts in the world’s largest economy.

Source:Investing

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SAXO

Economic

Central Bank

The inflation conundrum persists as ECB doubles down on rate cut

The upside surprise to UK inflation last week pushed the first BOE rate cut from August to November while the ECB expectation sat firm at June. ECB has increasingly talked itself into a corner where it must deliver or look foolish, but will the central bank look foolish regardless?

The ECB chief economist Philip Lane is telling the Financial Times that the ECB sees no issues with moving before the Fed on rate cuts and the data points have caused the ECB to remove the top level of restrictions. When the ECB moves next month it will follow recent central bank cuts from Switzerland, Sweden, Czech Republic, and Hungary. On Wednesday, the May preliminary German CPI figures are released and in the case we see another upside surprise the question that will come to mind is whether the ECB is about to make a policy mistake.

The ZEW survey recently surprised to the upside hitting 47 which significantly above the average of 19 the past 10 years suggesting the sentiment on the Eurozone economy is getting stronger and stronger. The fact that the Eurozone economy is bouncing back into growth despite what the ECB sees as restrictive policy rates should tell the ECB that the high interest rates were not the causality driving the mild recession, but instead the short-lived shock the war in Ukraine colliding with the effects from inflation.

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Wages have not cooled a lot in the Eurozone and the demographics mean that labour market could remain much tighter for much longer than what the ECB is expecting. Combining this with stronger commodity markets and the rebound in the economy and you have a potential dangerous cocktail for inflation if the ECB is also loosening financial conditions. To top it all, the geopolitics will add to inflationary pressures through two channels:

European finance ministers called G7 nations on Friday to stay united on the view that China is undermining market based economies with their trade practices. As we have said for some time. The harder China pushes on the export string to resolve their economic problems the bigger the pushback will be leading to tariffs and more reshoring of manufacturing pushing up goods inflation over time.

The war in Ukraine and the wider conflict with Russia will push EU countries to go beyond the fiscal constraints to ramp up military spending without sacrificing general welfare spending. This will be inflationary as it increases the investment rate in Europe and drives up demand for workers and raw materials.

Private equity is the thriving despite elevated interest rates

Last week's surprise upside to UK inflation and repricing of monetary policy delivered a blow to bond markets declining across the board. The biggest casualties however were real estate and gold declining 2.6% and 2.9% respectively. Emerging market equities also did not like this outlook of high interest rates for longer declining 1.5%.

The top performing asset class was listed private equity up 1.3% extending the year-to-date performance to 14.6% only surpassed by gold. Private equity has historically been thriving on low interest rates and as such one would have believed that high interest rates would be bad for private equity. But as the one-year performance shows, private equity has been the best performing asset class over the past year up 51.4%.

The biggest constituent in the listed private equity index is British 3i Group which reported results earlier this month highlighting strong performance with its portfolio company Action delivering strong annual growth of 28% and like-for-like growth of 17% which quite impressive for an European retailer.

Action is the fastest growing non-food discounter in Europe with more than 2,300 stores and €8bn in revenue. We highlighting 3i Group and its investment in Action, because it can sometimes be difficult to understand what investors are actually getting exposure to when investing in listed private equity. But essentially, investors are getting exposure to companies in various industries and the bet the investor is taking is that these private equity firms are able to deliver a return that is higher than that in public markets.

The Inflation Conundrum and Private Equity Party_2

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Cohen

Economic

Commodity

The current dynamic driving global wheat markets higher has been the ongoing dry conditions across much of Russia’s winter wheat belt. This has prompted local analysts to cut their production forecasts aggressively over the past few weeks. Lower production will eventually culminate in a lower exportable surplus for Russian traders in 2024-25, despite carrying in larger-than-normal stocks from the current season. But how did we get here?

Throughout the vast majority of last year and through the early parts of this season, the narrative has been that global wheat stocks are heavy, and this is the reason prices are lower. The sheer weight of selling pressure out of Russia meant that global consumers were able to dictate market values as traders struggled to clear surplus stocks.

Sentiment change

How quickly things can change. Fast-forward a couple of months, and add some unfavourable weather across the winter wheat fields of the number-one global exporter, and market sentiment has done a complete 180-degree turn. We have been losing new-season production potential in Russia, and international markets are now getting concerned about the available supply of wheat, ultimately pushing values higher.

There is nothing new here, as grain markets are seasonal, and market participants are familiar with the ebbs and flows that accompany changing weather and variable price environments. Sometimes these market dynamics can be easy to understand, and at other times they can be completely confusing.

Russia’s ascension to the number-one position among the major wheat exporters has likely added some complexity to the current market environment. The situation has been exacerbated by the recent exclusion of multinational traders from the Russian market, which has subsequently reduced transparency around Russian market dynamics.

The global wheat market had become very comfortable with supply, but now finds itself in a situation where a significant weather issue is playing out in Russia, which has the potential to tighten the supply situation quickly. The reduced transparency in the Russian market adds to the general uncertainty, helping push global markets higher as traders cover short positions and take risk off the table.

The challenge for global markets, as we start to lose supply, is to try to understand where markets need to price to resolve any balance-sheet issues. This equation is never easy, and is potentially more difficult this year, given that the major global production issue is playing out in Russia. The frequently asked question amongst traders is: Do we have enough supply to cover demand?

The global trade-flow matrix is extremely complex and effectively uses a combination of price, quality and availability to determine what wheat trades to where. Nothing is really set in stone, but there are many well-established trade flows that execute with great regularity. There are also other trade flows that are more opportunistic and price sensitive, and these are the ones that typically gather more attention during periods of stress in markets.

Price rations demand

In times of compromised global supply, the market’s focus is on examining the available supply among the major exporters to understand whether there is ample supply to cover the anticipated demand, and which trade flows can be switched. When that equation does not add up, the market typically starts to add risk premiums to prices. The market needs to encourage wheat owners to sell their stocks, or the market needs to move to a higher price level that will ration demand.

Does the global wheat market need to ration demand today? While this is not yet clear today, it is becoming more likely that we will need to ration demand to some extent to restore the balance sheet to a more comfortable level of stocks. Wheat stocks amongst the major exporters are suddenly getting tighter, and given wheat’s status as the major global food commodity, it remains imperative for market confidence that the market holds a reasonable level of free stocks from one season to the next.

The easy way to help restore the balance sheet when supply is lower is to ration demand, and as global wheat values edge higher, this is effectively happening. Since bottoming out in early March, wheat markets have added around US$50/t to global FOB values. This has caught global consumers by surprise, and will likely create some stress in the more price-sensitive markets. These higher prices will eventually lead to lower consumption and effectively ration demand in those regions.

Cheaper grains appeal

We have also seen a significant gap develop between wheat prices and global feedgrain prices on the back of this wheat rally. Corn is the primary global feedgrain, and is typically much cheaper than wheat, but over the past couple of years, there has been an abundant supply of relatively cheap feed wheat, which has competed openly with corn and other feedgrain commodities. There is around 150 million tonnes of wheat used in global stockfeed rations annually, so in a market environment where wheat supply is suddenly compromised, it is logical that cheaper feedgrain commodities such as corn will be substituted back into rations to replace wheat.

The bottom line today is that the wheat market has naturally started to ration demand via higher prices, even though this is not fully visible in the market. The question today is: How high do wheat prices need to go to resolve the balance-sheet issues? And the answer is that we don’t know at the moment, as the final global supply situation is not yet understood. It is possible that we have already priced enough risk premium into values today, but again this is unclear and is a key reason why wheat markets will remain volatile in the weeks ahead.

It is important for market participants to maintain perspective and balance their expectations around where global wheat prices are likely to trade. Ultimately, it is the job of the market to trade to a price level that will balance the supply-and-demand equation, and this is rarely straightforward.

Source:graincentral

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FastBull Featured

Data Interpretation

On May 27, local time, Germany's Ifo Institute for Economic Research released the Ifo Business Climate Index for Germany in May:

The Ifo Business Climate Index in May stayed at 89.3 points, unchanged from April's 89.3 but below the expectations of 90.4.

In manufacturing, the business climate improved for the third time in a row. Companies were considerably more satisfied with their current business. Although the order backlog continued to decline, the outlook for the coming months was less pessimistic than in the previous month.

In the service sector, the index declined. This was due to somewhat worse assessments of the current business situation. However, expectations improved a bit. Companies reported additional orders.

In trade, the index took a significant step upward. Business expectations improved considerably. The current situation is looking up as well, a trend driven primarily by the wholesale segment.

In construction, the index improved once again. Companies were more satisfied with their current business situation, and their expectations were also somewhat less pessimistic. A lack of orders, however, remains a core problem.

The German economy is gradually emerging from the crisis. Companies were less satisfied with their current business situation, but their expectations for the coming months have improved. The manufacturing, trade, and construction sectors are recovering, although the service sector took a slight hit.

Ifo Report for May

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Economic

Central Bank

Busy calendar, inflation stands out

With the market counting down to next week's ECB meeting, the preliminary inflation report for May will be published this week. The data calendar is rather full and includes unemployment data for the eurozone and the German retail sales, but the focus will be firmly on inflation.

The various German states will start reporting their respective inflation data from 08:00 GMT on Wednesday with the German aggregate print expected at around 12:00 GMT. The market is currently expecting a small acceleration to 2.4% yoy from 2.2% in April. Then, on Friday, the euro area headline figure is forecast to edge slightly higher to 2.5% with the core indicator that excludes energy, food, alcohol and tobacco remaining at 2.7%.

The euro area economy is picking up pace

Based on the recent economic data, the economic recovery is gaining speed in the euro area. More specifically, the upside surprise in the GDP for the first quarter of 2024 has been followed by stronger business survey prints. Last week's preliminary PMI reports and Monday's IFO business survey from Germany confirm this trend change.

This apparent economic improvement has been noted by the ECB members, but their overall rhetoric has not been moderated. Essentially, since the April 11 meeting, ECB officials have been focused on preparing the market for the June 6 rate cut. While the ECB does not precommit, this rate cut could be the one of the most telegraphed rate moves in the history of the ECB.

June rate cut is a done deal; focus on the July meeting

The discussion has gradually moved to the July meeting's outcome. The doves are clearly advocating for consecutive rate cuts, assuming that the June meeting results in a 25bps rate move. This week's inflation report will play a key role in the behind-the-door discussions and the overall rhetoric at the imminent ECB meeting regarding the ECB's outlook for the rest of 2024.

A strong inflation report, for example, if the euro area headline inflation accelerates aggressively above 2.5% and the core indicator jumps above 3%, is unlikely to change the strong expectations for the June gathering. However, it could significantly dent the growing chances of back-to-back rate cuts.

On the flip side, a weaker inflation report will just act as confirmation of the June rate decision and keep the July rate cut option firmly on the table.

Euro needs a strong inflation report

Despite the evident economic divergence between the US and the euro area, the euro has been on the front foot against the US dollar over the past month. However, this bullish trend has stalled lately as the stronger US data releases are raising doubts about the realistic possibilities of the Fed cutting rates in 2024.

All in all, this week's eurozone preliminary inflation report is unlikely to change the medium-term outlook for the euro. Having said, if inflation surprises on the upside, we could see some upwards pressure on euro/dollar towards the 1.0900 area. On the other hand, a weak inflation report could open the door to a move below the busy 1.0773-1.0809 area, which is currently acting as very strong.