Global stock markets are heading for a correction in the coming months, though overall they should post marginal gains between now and the end of 2023, according to a majority of analysts polled by Reuters.
A bad year for stocks in 2022 carried into this year as global central banks battled inflation with interest rate rises that are now largely drawing to an end.
But while an unexpected surge in stock prices from May through July has coincided with news most major economies are performing better than expected, a nagging worry among analysts that stocks will underperform has not really gone away.
Attractive rates in money markets well above inflation have also dimmed the allure of equities, which during a long era of zero interest rates and low inflation were repeatedly described as the only game in town for investors.
A jump in benchmark US Treasury yields to 2007 levels before the 2008 global financial crisis shows investors coming around to the view that even as the Federal Reserve’s hiking cycle campaign nears its end, interest rates will stay higher for longer.
Fed chairman Jerome Powell is due to deliver a speech at the annual central bankers’ conference in Jackson Hole, Wyoming on Friday that has the potential to further embed those expectations.
A 71% majority of analysts, 55 of 77, who answered an additional question in the Aug 9-23 poll said a correction by year-end in their local equity market was either likely or very likely. The remaining 22 said unlikely or very unlikely.
“We do not see any upside from here into year-end … but we think there is a good chance that equity markets move meaningfully below our year-end projections in the interim,” noted Marko Kolanovic, chief global market strategist at JP Morgan.
But market volatility is low, despite a substantial upgrade to expectations for how the world’s largest economy will perform that is wiping out once-widespread predictions for Fed rate cuts early next year.
“Recession projections have been erased, with soft/no landing the new base case. There is no more fear, only complacency,” noted Kolanovic. A “fear of missing out” is said to have helped drive much of the equity market rallies of recent years.
Nikkei, Bovespa to outperform
Most indices, including Wall Street’s benchmark S&P 500, are expected to record marginal gains by year-end from current levels, according to the poll.
The S&P 500 index, up nearly 15% already this year but down over 4% this month, was forecast to end the year at 4,496, about 2.2% above Monday’s close of 4,399.77. The year-end forecast in February’s Reuters poll was 4,200.
Terry Sandven, chief equity strategist at US Bank Wealth Management, said the index “may currently be in correction mode.”
Of 15 stock indices covered by the polling, only four were forecast to rise more than 5% by year-end.
Japan’s Nikkei was predicted to gain nearly 8% from now, outperforming its major peers. Among emerging economies, Brazil’s Bovespa and Mexico’s S&P/BMV IPC were forecast to rise around 13% and 7% respectively.
Japan’s central bank has maintained an ultra-easy monetary policy throughout the global cycle, resulting in a sharply weaker yen, and Brazil’s central bank has just started cutting interest rates.
Nearly all other indices were expected to either fall or post only marginal gains before the year ends.
Europe’s STOXX 600 and the blue-chip Euro STOXX 50 indices were expected to gain 1.3% and 0.6%.
Indian equities, up over 7% for the year, were expected to rise only another 1.2%.