While stocks continue their rally, several major financial institutions are now predicting a significant decline in global markets. The S&P 500 has risen more than 10% since its lows last October. In Europe, the STOXX 600 rose more than 15% over the same period. But those gains are now at risk, according to some investment banks, as they fear the lingering effects of monetary tightening are likely to hit earnings and cause profit margins to compress this year. .STOXX 1I line Here are the five biggest calls so far: Bank of America: STOXX 600 down 20% through Q2 The Wall Street bank believes the current strength in the stock market is unsustainable and could lead to a bear market by the second quarter of this year. We expect Eurozone and US growth to weaken to recession levels in response to sharp monetary tightening. Shares are far from pricing in this scenario, having been buoyed by recent strength in hard data due to companies working to reduce backlogs. If growth weakens, in line with our projections, as the excess of firm data over new orders fades and underlying demand continues to weaken in response to monetary tightening, that would be consistent with a decline of around 20% for the Stokk 600 to 365 .- January 20 GMO, S&P 500 down 20% to 3,200 since December. GMO President Jeremy Grantham, who predicted a bear market last year, said that share prices are currently supported by the “positive influence” of the so-called cycle. However, a prominent investor expects the S&P 500 to fall to 3,200 “and spend at least some time below it this year or next.” The awakening of the peak overconfidence bubble is behind us, and stocks are now cheaper. But due to the sheer length of the list of important downsides, I believe continued economic and financial problems are possible. I believe they could easily turn out to be unexpectedly scary. Therefore, I believe that a continued market decline of at least significant magnitude, while not nearly as certain as it was a year ago, is much more likely than not. – January 24 UBS: STOXX 600 down 8% to 410 through December. The Swiss bank also sees the potential for an 8% decline to 410 (SKSKSP) due to falling earnings/margin expectations. We think the market is significantly underestimating downside risks. With global growth yields and risks expected to remain elevated for most of this year, we do not expect a material recovery in value from what we have already seen this year. – January 11 JP Morgan: STOXX 600 up 3% to 465 through December. The US investment bank has a more mixed outlook. JPMorgan strategists said the current market rally was likely to begin to fade in the first quarter of 2021 as the catalysts that had boosted stocks since October — peak bond yields, inflation and the U.S. dollar — were incorporated into the market. JPMorgan believes the market will remain flat for the rest of the year. We believe the current market rally will begin to fade as we move through Q1. The stock market is acting like we’re in an early cycle recovery, but the Fed hasn’t even concluded the hike yet. While January still offers favorable seasonal factors and current investor positioning is far from dire, both currently supportive of stocks, we believe potential gains over the coming weeks should be used to reduce exposure. – January 23 Barclays: The STOXX 600 rose 6% to 475 through December. UK-based investment bank Barclays is bullish on the European stock index. The STOXX Europe 600 is expected to end the year up 6% from current levels. That points to data showing that hedge funds have been reducing their net short positions in stocks, which removes downward pressure, to base its opinion on. Short interest has halved from Q4 highs in EU stocks, but remains elevated in US macro [hedge funds] have moved into long stocks, and their exposure is close to 12 million, but still below average. Long-short funds also reduced short positions, but their net exposure also remains low. US investors’ buying of European equity ETFs also picked up, but overall positioning in the region remains far more cautious than the positive consensus sentiment on the region suggests. – January 25th
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