Wall Street equity analysts sure are a gloomy lot these days. Based on the average estimate of forecasters surveyed by Bloomberg, they expect the Standard & Poor’s 500 Index to finish the year 1 percent lower than yesterday’s close.
This is noteworthy because it’s so out of character. Most of the time — 82 percent during the past decade, to be precise — analysts are bullish. To be fair, this outlook has usually been rewarded; market rise about three-quarters of the time.
The unusually bearish demeanor from the normally cheerful analysts on the street of dreams might be the single-most useful piece of news about equity markets I have seen this month.
Why are the forecasters so negative? They gave a slew of reasons:
• Rising interest rates
• Little movement in share prices
• Elevated stock valuations
• Declining corporate profits
• Aging business cycle
In the old days, these were known as the “wall of worry” for stocks to climb. That’s why I find this negativity to be bullish for U.S. equity markets. As the calendar third quarter comes to an end today, let’s unpack some of the thinking behind this view, and why it might be worth taking the other side of the trade.
I could address each of these, one by one: Rising interest rates? Ooh, they might jump to all of 0.5 percent this year, and they could even hit 1 percent next year! (Just for some perspective: In the 20 years before the financial crisis, short-term rates averaged 4.85 percent.) And we have been hearing about lackluster earnings for four years now. Stock valuations? When they are actually cheap, investors tend to shun them, and they have been expensive by most measures for most of the past 30 years.
But rather than respond to each worry, I’d prefer to approach this from a meta-perspective. There are a few things that might undercut analysts’ collective fears. Let’s jump right in: