The stock market should cool, according to several strategists, who are telling clients to start positioning defensively in preparation for a slow-growth earnings environment next year. "We believe the 'too high, too fast' rally is ready to take a breather" in the first quarter of next year, Barclays U.S. head of equity strategy Venu Krishna wrote in a note Tuesday. A seven-week advance of about 14.6% in the S&P 500 is bigger than any seven weeks of consecutive gains in the past two decades, Krishna noted. Investors haven't taken their foot off the gas since Treasury yields peaked in late October. The latest push higher, which sent the Dow Jones Industrial Average above 37,000 for the first time, came in response to Federal Reserve officials leaving rates unchanged last week and signaling that several cuts are expected. rates by 2024. The S&P 500 is up almost 24% this year, but rose 11% in the fourth quarter alone. After closing Tuesday at 4,768, the benchmark used by most professional investors to measure their performance is now less than 1% away from surpassing its record close set in January 2022. On average, market watchers expect that the S&P 500 closes next year. at 4,881, according to the consensus target compiled in a CNBC survey of strategists published on Monday, which equates to just a 2.4% advance over the next 12 months. Barclays' analysis of past interest rate cuts indicates that they have proven to be a reliable buy signal over the past 40 years, according to Krishna. During those periods, technology and defensive sectors, such as healthcare and consumer staples, as well as large-cap names rather than small-cap stocks, have delivered the strongest returns. "We hope that big technologies will be the main driver of [S & P 500] earnings growth in FY24, supported by secular growth drivers, but we remain skeptical about the expected strong earnings recovery for the rest of SPX, especially with most sectors facing margin pressures," he said Krishna. "This leaves us skeptical about the longevity of the ' Krishna was referring to stellar fourth-quarter returns from this year's laggards. The SPDR S&P Regional Banking ETF, for example, is up 24% this quarter, but is still down 12% for The S&P 500 real estate sector is ahead 16% for the quarter, outperforming the S&P 500, but had underperformed throughout the year, rising just 7%, less than a third of the entire market's gain. RBC Capital Market's head of US equity strategy, Lori Calvasina, similarly maintains that while she remains bullish on the domestic equity market over the next year, the risk of a pullback has increased. She says new money inflows into U.S. stock funds may begin to slow. and the S&P 500 looks "very expensive" compared to Europe. According to Calvasina, the industrial sector is the most overvalued in the S&P 500, while energy and communications services offer the most attractive valuations. .GSPHC YTD mountain S&P Health Care sector performance this year. JPMorgan advocates a defensive strategy, noting that the stock's price-earnings multiples look especially expensive. "We expect both inflation data and economic demand to soften in 2024," chief market strategist Marko Kolanovic wrote on Monday, pointing to headwinds hampering further gains such as slowing consumer spending, geopolitical tensions and costly valuations of risk assets. "Even in an optimistic scenario, we believe upside is limited for risk assets, favoring cash and bonds over stocks from a risk-reward standpoint." JPMorgan maintains a defensive allocation in its model portfolio heading into next year and recently added a weighting to Japanese stocks given their cheap valuations and strong balance sheets. Looking ahead, Kolanovic also expects a difficult year for corporate profits. "After a period of record pricing power, the recent disinflationary trend should become a major headwind for corporate margins amid sticky and lagging wage trends," Kolanovic said. "We expect lower sequential revenue growth, no margin expansion and lower [stock] buyback executions."
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Strategists say red hot stock market rally is due for a breather
