Many portfolio managers are increasingly bullish, even with the stock market trading around all-time peaks, according to Citigroup Inc.
Video: Record close for S&P 500, Nasdaq; bond yields fall (Reuters)
“Investors want markets to move higher, underscoring the reality that investment professionals are paid to participate and not to sit back and wait for better entry points,” the Citi analysts said in a research note published at the end of last week. “Consequently, they need to convince themselves that all is okay.”
Meanwhile, the portion of companies in the S&P 500 that “soundly” beat the stock market benchmark saw a steep drop in the second quarter, according to the report. The chart in the Citi Research note shows that only about 10% of the index’s constituents outperformed the S&P 500 by 10% in that period, down from more than 30% of constituents during the first three months of this year.
“We find investors overly comfortable with valuation being solely a function of low interest rates, even as equity risk premiums are firmly above typical levels prior to the global financial crisis,” the Citi analysts said in the report. “Interest rate suppression implies that Fed or ECB forecasts for durable GDP expansion are not particularly compelling.”
The U.S. stock market ended last week at record highs, with the S&P 500, Dow Jones Industrial Average and Nasdaq Composite keeping up their advance in Monday afternoon trading, FactSet data showed at last check.
“We regularly get pushback from more upbeat investors who tell us that earnings and liquidity argue for more upside and that we are overly worried,” the Citi analysts said. “As a result, the concept of ‘this time’s different’ is palpable and disconcerting.”
Meanwhile, the Federal Reserve has kept its benchmark interest near zero, signaling at its policy meeting in mid-June that lift-off could happen in 2023 based on the median forecast of Fed officials. After the meeting concluded with what many investors and analysts perceived as a hawkish pivot, Barclays moved up its expectations for the Fed to begin tapering asset purchases under its quantitative easing program as soon as this year.
Yet the yield on the 10-year Treasury note has slid since then amid concerns over peak growth, and as some market analysts point to technical drivers such as short covering. The 10-year yield was around 1.37% in Monday afternoon trading, compared with about 1.57% on June 16, the day the Fed meeting concluded.
Meanwhile, the S&P 500’s rise this year “far exceeds median or average returns,” according to the Citi report.
The S&P 500 gained about 15% through July 8, increasing about 8.2% in the second quarter and up about 5.8% in the first three months of 2021, the report shows. The median first-half performance for the S&P 500 since 1900 is 3.8%, according to Citi.
The analysts also weighed in on this year’s tug of war between growth and value stocks, with the Russell 1000 Value index lagging in the second quarter after beating the Russell 1000 Growth index in the first quarter, the report shows.
“We continue to believe that a ‘last hurrah’ value rally is likely” as the economy continues to reopen from the pandemic, the Citi analysts said.
Still, amid broader concern that “complacency breeds risk tolerance,” the analysts said that “we are on the side of caution at this juncture, even if we are unable to determine the exact cause of the next drawdown.”