Around this time last year, global equity markets were haemorrhaging from the pandemic-driven economic damage but that was followed by a huge upswing, boosted by unprecedented stimulus and the recovery at hand.
While stocks have continued to rise significantly this year, the news flow on inflation has whipsawed financial markets – with equities falling on data pointing to increased price pressures and rising on reaffirmed dovish monetary policy stances.
Reuters polls of nearly 300 equity strategists taken May 10-26 showed all 17 stock indexes surveyed on were forecast to rise, with annual gains in nearly all of them predicted to be in double digits this year.
“When it comes to assessing the market environment we prefer to choose ‘half full’. We will remain vigilant for rebalancing opportunities … as we expect rates and equities to drift higher,” noted Ehiwario Efeyini, senior market strategy analyst at Bank of America.
“In terms of the broader economic environment, we are closer to mid-cycle than late cycle and that growth is currently flashing bright green and surprising more than expected.”
But forecast gains for 15 of those 17 bourses to end-2021 were lower than year-to-date returns, suggesting more modest rises and concentrated within specific sectors, rather than a broad and significant leg higher.
“The rotation in stock markets has further to go over the next few years, as many of the factors which have worked in its favour since late last year resume,” noted Oliver Allen, markets economist at Capital Economics.
“However, we expect bond yields, especially in the U.S., to resume their rise. Meanwhile, we are forecasting a strong recovery in the global economy and that will boost the relative appeal of value stocks.”
Nine indexes were forecast to surpass their current peaks, including the benchmark S&P 500 index – which is already up nearly 12% this year and forecast to rise 2.5% further to a life high by end-2021.
“There’s still some fuel left in the tank” for the U.S. stock market, said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute in St. Louis.
“A lot of folks are still coming to grips with the fact that the earnings outlook will be a lot better than was expected even as recently as a few months ago.”
When asked what was more likely for corporate earnings for the rest of this year, over 80% of strategists, or 92 of 114, said they would rise, including 49 respondents who expected a significant rise.
The remaining 22 said decline or about the same.
“HUNT FOR YIELD”
In response to another question, over half the strategists, or 55 of 97, said “hunt for yield” would sway global stock markets in the next three months, while 42 expected “safe-haven bets” to drive markets.
When asked on valuations at current levels, over three-quarters of analysts, or 86 of 110, said equity markets they covered needed to gain at least another 5% to be called expensive, including 47 who expected a run up of 15% or more was required.
The remaining 24 analysts said they were already over-valued.
That lines up with responses to another question, where about 60% of strategists, or 67 of 115, said a significant correction over the coming three months was unlikely in the markets they cover.
The remaining 48 respondents said likely.
“Investors have voiced concern that peaking fundamentals are a harbinger for stock prices,” said Jonathan Golub, chief U.S. equity strategist at Credit Suisse.
“We agree Q221 will experience the fastest economic and earnings growth in the reopening period, the result of the vaccine rollout and government stimulus. We disagree, however, that peaking growth represents a headwind for market success.”
Canada’s main stock index was forecast to climb above the 20,000 threshold for the first time by end-2021, while Japanese shares were expected to recover and reach a 30-year peak.
Brazil’s equity market was forecast to surpass its current peak, but was predicted to be on course for its second slowest year since 2015, with investors worried about the mounting human and financial toll of COVID-19 in the country.
Indian shares were predicted to continue their recent rise and by year-end nudge past a life high hit before the latest coronavirus wave took hold.
But European stocks were set to hold around or inch just above current record levels as the initial boost from the region’s V-shaped recovery after the COVID-19 downturn was expected to lose momentum.
