NEW YORK, Nov 22 (Reuters) - The recent rally that has boosted U.S. stocks and bonds is more of a year-end rally than a turning point, according to big money managers, who see fiscal and monetary policies, Next year's presidential election and recession fears will likely begin to weigh on markets.
Since the end of October, the S&P 500 (.SPX) is up approximately 10% and the Nasdaq (.IXIC) has risen 13% as investors increased their bets that the Federal Reserve's tightening cycle is over after signs of cooling inflation and job growth and a better-than-expected third-quarter earnings season.
Ten-year Treasury yields hit a 16-year high of 5.021% in late October, but have fallen back to 4.414%. Lower yields have fueled a technology-driven rally in stocks.
Some big investors and advisors believe, however, that the reasons to rejoice are short-lived and that growing concerns about the economy will begin to weigh on asset prices early next year.
"We've started to see some signs that things are a little weaker than people think," Ryan Israel, chief investment officer at Bill Ackman's Pershing Square Capital Management, told clients last week, adding that the main focus is where the economy is. qualification.
Markets may have โgone too far in extrapolatingโ rate cuts in early 2024 from recent data suggesting consumer inflation is falling and the U.S. labor market is weakening, said Mohamed El-Erian, advisor to the financial services firm Allianz SE. (ALVG.DE).
While inflation has become less central after US consumer prices remained unchanged in October, the consequences of the 525 basis points of total interest rate increases are on investors' minds of the Fed from March 2022, along with the central bank's efforts to reduce its balance. within the framework of the so-called quantitative adjustment.
Global economic growth is generally expected to increase slow in 2024, hit by high interest rates, higher energy prices and slower growth in the world's two largest economies, the United States and China. However, most economists believe the world will avoid a recession.
"I don't think the market is going to dodge a very aggressive Fed tightening cycle and then a continued quantitative tightening environment without some damage being done at some point next year," said Peter van Dooijeweert, head of alpha Man's tactical and defensive Group Solutions Unit, which creates portfolios for clients. His focus is now more on earnings, credit markets and broader economic data for signs of a possible slowdown.
Next year's US presidential race is also a cause for concern because it could be a source of further market instability. "As we get closer to 2024, with a general election that's going to be extremely contested, I think we'll see more risks there," said Max Gokhman, head of MosaiQ investment strategy at Franklin Templeton.
MAGNIFICENT SEVEN
One of the biggest sources of uncertainty for investors is the performance of the so-called Magnificent Seven group, made up of very large companies, which have boosted stock market indices this year.
Bill Gross, co-founder of bond giant Pimco, who now manages his own money and that of his foundation, told Reuters in an email that falling yields have greatly benefited technology stocks, which are also driving the decline. investor enthusiasm for artificial intelligence. But he sees little room for the 10-year Treasury yield to drop to 4.45%. "Let's not expect yields to be a contributing factor in the future," he said.
To gain fresh momentum in market performance, tech stocks will rely more on showing how AI can improve outcomes, investors said. Last month, Microsoft (MSFT.O) quarterly results beat Wall Street sales estimateswith its cloud and PC computing businesses growing as customers anticipated the use of its AI offerings.
"The market might be too optimistic about how much of the AI โโboom is actually going to contribute to the Magnificent Seven's profits," van Dooijeweert said.
A Reuters poll on Tuesday showed that strategists estimate the S&P 500 will end next year only around 3% higher than their current level, as they fear an economic slowdown or recession.
"I think it would be important to keep your convictions pretty loose as New Year's Eve passes," said Franklin Templeton's Gokhman.
Reporting by Carolina Mandl, David Randall and Svea Herbst-Bayliss; Editing by Megan Davies and Leslie Adler
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