Investors, according to Kolanovic, are putting too much weight into the idea that an economic recession will be avoided in 2024. That view, combined with the fact that equity valuations are rich, credit spreads are tight, and volatility is “unusually low” suggests to Kolanovic that now is not the time to be piling into stocks.
“We remain cautious on risky assets and the broader macro outlook due to the interest rate shock (over the past 18 months) that should negatively impact economic activity, fading consumer strength, geopolitical headwinds, and expensive risky asset valuations,” he said.
He added later, “Even in an optimistic scenario, we believe upside is limited for risky assets.”
His defensive view towards stocks has been consistent with his overall bearish outlook since late 2022, which ultimately proved to be the wrong call as stocks have soared in 2023.
But Kolanovic sees a path to redemption in 2024, as he expects both inflation and economic demand to soften next year, which should hurt equity prices.
“In the US, post-pandemic tailwinds, building monetary headwinds, and dwindling fiscal offsets should all contribute to slow growth to below trend in 2024,” he said.
Importantly, Kolanovic isn’t buying into the idea that the Fed will aggressively cut interest rates in 2024, as much of the market currently expects, because it will be difficult for inflation to drop from the current 3% pace to the Fed’s long-term target of 2%.
Kolanovic said only a softening of the labor market would enable inflation to get back 2%, which means rate cuts will likely be fewer than expected in 2024.
“We do not expect the Fed to take further strong action against inflation but instead to keep policy modestly restrictive,” Kolanovic said.
For US stocks, gains will be limited, if not downright negative in 2024 because of muted earnings growth, a rollover in corporate pricing trends, and the likelihood that volatility will return to the market after falling to abnormally low levels this year.
“After a period of record pricing power, the recent disinflationary trend should become a major headwind for corporate margins amidst sticky and lagging wage trends. We expect lower sequential revenue growth, no margin expansion, and lower buyback executions,” Kolanovic said.
Kolanovic set a 4,200 price target for the S&P 500 in 2024, representing potential downside of 12% from current levels.
My take: I think he’s right but there’s the question of timing, to me, looks like rally can last in Q1, after that we shall see.
