Punch-drunk stocks keep dodging as analysts see peak

Oliver Renick

They don’t go up. Neither do they stay down.

That’s the story of U.S. stocks, which three months after a 10 percent correction and mired in the longest decline of the seven-year bull market just shook off another global shock and rallied back to even. The 5.3 percent selloff of June 24 and 27 is now a blip on a chart after $1 trillion in market value was erased and restored over eight days.

The volatility never swayed Wall Street equity strategists, who let stand forecasts for shares to reach records in 2016. While U.K. secession joins a lengthening list of ills for investors that include falling profits, soaring valuations and the presidential race, events of the last two weeks show just how hard it is to land a blow on equities when economic growth is too fast to signal a recession, and too slow to steel the Federal Reserve.

“The only reason you see weakness in the market on an event is if it has the potential to bring a recession, and there is no data to support that,” Tony Dwyer, co-head of U.S. equity Research at Canaccord Genuity Inc. in New York, said by phone. “We’ve got the same outlook as we did going into it and that’s why I’m bullish.”

Odds of a U.S. recession haven’t budged since the Brexit vote, going by economist forecasts. U.S. gross domestic product will rise by 1.8 percent this year, according to the median estimate in a survey by Bloomberg as of July 1 — the same as before the vote.

Beneath the surface of the four-day rally that sent the Standard & Poor’s 500 index roaring back to pre-Brexit form is a statistic that’s fodder for bulls who say the quick rebound is a sign of things to come. Of all the trades executed on the New York Stock Exchange Tuesday and Wednesday, 90 percent led to higher prices. Futures on the S&P 500 expiring in September slipped 0.5 percent at 6:46 a.m. in New York.

While you might not want to build an investment case around it, demand like that has portended bullish things in the handful of times it’s ever occurred. Data compiled by Sundial Capital Research shows that since 1950, when there are two straight days of 90 percent positive volume, the market was higher every time three, six and 12 months later. The average gain was 11 percent, 17 percent and 29 percent.

It’s not like strategists needed any extra encouragement to stand by their end-of-year estimates for equity markets. The average S&P 500 target price of 2,152 among 18 analysts surveyed by Bloomberg has remained mostly static since the market bottomed at 1,829.08 on Feb. 11, and the past week was no exception. The S&P 500 closed Friday at 2,102.95.

Just one member of the group — Deutsche Bank Securities Inc.’s David Bianco — adjusted his forecast for the benchmark gauge following the Brexit decision, lowering it by 50 points. Bianco remains squarely a bull, saying the S&P 500 will climb to 2,150. Just two reduced earnings estimates, neither by more than a dollar.

One strategist number that did tick down was the average recommended allocation to equities, near 50 percent. The low rating relative to bonds and cash has been part of a contrarian bull case maintained since April by Savita Subramanian, Bank of America Corp.’s head of U.S. equity and quantitative strategy.

“Historically when our indicator has been this low or lower, returns over the next 12 months have been positive every time,” she wrote. “While sentiment has improved significantly off of the 2012 bottom, when this indicator reached an all-time low of 43.9, today’s sentiment levels are still well-below where they were at the market lows of March 2009.”

Reasons for shrugging off the political upheaval in Europe are the same among strategists. They cite U.S. corporate revenues that are well-insulted from a slowdown in European economic activity, a timeline for the U.K.’s official secession that’s likely to be a slog, and the continuing growth of the American economy.

“We view the shock from Brexit as fundamentally local, not global,” Goldman Sachs Group Inc. economist Charles Himmelberg wrote in a note Friday . “The U.K.’s economy is too small and growing too slowly to disrupt global growth rates by much.”

In some ways, Brexit helped bulls as much as it hurt them. Case No. 1: Interest rates. Overnight, investors went from speculating on the timetable for the next Fed tightening to making the odd bet its next move will be to cut rates, according to Feds funds futures.

Some analysts say sinking bond yields will continue to drive investors toward higher-yielding assets like equities. Treasury yields plunged after the vote, with the 10-year plumbing new three-year lows down to 1.44 percent. That compares with a dividend yield on the S&P 500 of 2.26 percent. The spread reached 0.845 percentage point on June 27, the widest since 2009.

“We’ve seen a strong outperformance of U.S. rates with the 10-year touching an all-time low and in that kind of environment you see a search for yields and high-dividend paying stocks,” Stewart Warther, an equity and derivatives strategist at BNP Paribas SA, said by phone. “As central banks become more involved and continuity to be drivers of price action in all asset classes, you’ll have a shift from fundamentals to liquidity-based investment.”

One of the most cited reasons is simply that nothing’s changed for U.S. investors. Economic data continues to point to a strengthening U.S. labor force, and a rebound in oil prices as well as a weakening U.S. dollar will in part be the drivers for the first quarter of earnings growth since 2015, according to Canaccord’s Dwyer.

U.S. companies also aren’t as reliant on a bustling European consumer as the size of the EU trading bloc might suggest.According to Dubravko Lakos-Bujas, head of equity strategy and global quant researchat JPMorgan Chase & Co., S&P 500 companies derive just 6 to 7 percent of revenues from Europe. Even in the most exposed group — technology stocks — less than 11 percent of sales came from the region.

Whatever the reason may be, 19 strategists at some of Wall Street’s strategists biggest financial institutions agree on one thing — Brexit, despite all the fireworks, is no big deal for stocks.