US stocks gripped by high inflation, rising rates

“You could argue that the market has operated effectively with the largest and most stable companies acting most defensively within the index. However, this also potentially presents a bearish scenario where these stocks could be the last shoe to drop before exiting the current bear market.

If you believe the likes of GMO’s chief investment strategist, Jeremy Grantham, then you should be bracing for another downfall.

He said in early June that speculative stocks are taking off first with 40% of Nasdaq stocks now down more than 50%. Then the others follow.

He thinks the S&P 500 will probably drop by 50%.

“The problem is: is it slow or is it fast? »

He suggests it will be slow because U.S. unemployment is near a 50-year low, consumers still have plenty of cash, corporate balance sheets are in good shape, and inflation could stabilize.

These are all the same things that Fed boss Jerome Powell uses to back up his theory that higher interest rates won’t necessarily lead to a recession.

Banks have lowered their forecasts for economic growth. Last week, Morgan Stanley warned that shifts in aggregate demand due to rising interest rates would lead to GDP growth this year of just 1.4% and 1.6% in 2023.

“This is a significant downward revision from the 2% growth for 2022 and 2.1% for 2023 contained in our mid-year outlook.”

Almost all of this depends on inflation and where it is going. Could supply-side constraints magically disappear? Could wage growth suddenly slow? Could geopolitical conflicts and improved national energy policies lead to increased production that would help settle higher energy prices?

The U.S. midterm elections in November could see Republicans sweep the House and Senate, giving them significant influence over energy policy. With gasoline prices up more than 48.7% in the year to May, deeply unpopular President Joe Biden may have to cave and temper the anti-fossil fuel rhetoric.

It’s interesting how energy stocks have become a strong bet. During the same week, Morgan Stanley cut GDP, it also polled analysts to see where they were confident earnings would be revised higher through 2023.

Among those high conviction picks were Exxon Mobil, Marathon Petroleum and energy equipment maker Tenaris. Analysts have indicated 17%, 25% and 46% rise in the companies’ stock prices respectively.

There are also a lot of bullish calls in the market. Wealth managers such as John Lynch, chief investment officer of Comerica Wealth Management, are betting on a rising market.

It expects margins to gradually erode from record highs, but the S&P will be higher and not lower by the end of the year. “Our below-consensus earnings forecast suggests that the S&The P 500 index will be fairly priced in the 4000-4250 range by the end of the year. We maintain our preference for value, quality small caps (profitable) and cyclical sectors, notably energy, materials, industrials and financials.

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