Goldilocks  Before Bears

Yesterday NDR released our Second Half US Equity Outlook which outlines why we’re still overweight equities within US AA since Jan and explains the reasons behind increasing our year-end S&P 500 target from 4300 to 4500. Fears about recession, inflation, banks and over-tightening helped markets climb a wall of worry YTD, and NDR’s pessimistic sentiment indicators kept us bullish on stocks. Our S&P 500 Cycle Composite (see chart) also gave an out-of-consensus view, and now suggests an uptrend into Q3. However, as markets are forced to thread an ever-shrinking needle of avoiding recession without triggering an inflation resurgence, the rally could overshoot before a late-year pullback for the following reasons:

• Macro goldilocks likely for a few more months? The Economic Surprise Index remains in it’s most bullish zone for stocks, and equities have tended to rally during disinflationary periods. The lagged effects of housing components and yesterday’s PPI report imply continuing disinflation for a bit longer.
• Earnings expectations higher for Q2-Q4. Given 79% of S&P companies beat consensus estimates in Q1, even if earnings growth continues to recover, markets may not be as pleasantly surprised. Y/Y earnings growth expectations have also jumped from 1.4% pre-earnings season to 6.4%.
• Sentiment almost excessively optimistic. Although equity fund flows are still negative YTD, last week the NDR Crowd Sentiment Poll threatened to hit excessive optimism for the first time since Jan 22, suggesting investors are approaching the top of the worry wall.
• Broader rally is necessary. A record low 20.3% of stocks outperformed the S&P 500 from Mar 1^st - May 30^th, but a narrow market isn’t a death sentence – the S&P gained 25%+ after narrow periods in 1980 and 2020. However, breadth improvement does need to continue for a deep second half rally.

If you would like a copy of the Second Half US Equity Outlook, please fill out the form to the right and a member of our team will get back to you soon.

Ned Davis Research is a leading provider of signal-based, top-down market analysis, with dedicated strategies across global asset allocation, Equities and Fixed Income.