According to the data, annual consumer price inflation is currently at a three-year high, making it difficult for the Fed to lower interest rates. Futures on stocks point to a difficult future.
Wall Street is beginning to worry about whether the technology/AI trade will continue to be profitable. Our call of the day from Barclays’ global head of equity tactical strategies, Alex Altmann, is to put a hold on US stocks due to a concerning technical setup.
Typically, the strategist is not an anxious person. In March, when the Iran dispute was still in its early stages, he exhorted investors to stick with their guns, just as he had done in September of previous year when Wall Street was moving in the opposite direction. It would have taken steely nerves to follow that advise, as the market first declined at the start of the conflict before rising to all-time highs in June.
Altmann stated on a Barclays webcast on Tuesday that he is now advocating for a change to a short-term tactically conservative perspective on U.S. stocks. He clarified that the cost of financing has “exploded higher,” impacting stock-market multiples and raising real yields, or profits obtained after accounting for inflation.
Additionally, he is concerned about excessive enthusiasm on Main Street and Wall Street. “We can see that retail euphoria is as high [as], and in some cases even higher than, what we saw in 2021, bearing in mind we were in deeply negative real yields then versus positive real yields today,” he stated.
According to Altmann, institutional pessimism has also vanished. “That’s not to say it’s wrong, but, in our experience, when we get to this level of euphoria, the forward-return profile on the S&P doesn’t look that good anymore.”
Two weeks ago, he and his colleagues began to notice increasing signals of enthusiasm among individual investors, crowded positioning in AI-linked transactions, and investors “reaching for the upside” rather than the downside when it came to stock options. These observations caused him to change his approach to stocks.
Additionally, he is concerned about the potential negative effects on markets that leveraged exchange-traded funds, especially those based on individual equities, may have.These tail-wagging-the-dog situations arise because, in order for these levered ETFs to rebalance every day, they may end up pushing a disproportionate amount of stock through the underlying channel. This could then become a self-fulfilling prophecy, pushing stocks that have already experienced significant gains even higher and vice versa, he said.
According to him, that is essentially what has been going on for the last few weeks.
The resurgence of interest in momentum trading, when investors chase rising equities, is another problem.Momentum is now crowded. You end up with a highly congested set of trades because it has captivated the interest of the institutional and retail communities,” he stated. Even in the event of minor positioning changes or narrative alterations, those trades are thus susceptible to quick and drastic reversal.
According to Altmann, he is hoping for a complete 6% or 7% decline in the S&P 500, which he believes may already be halfway done given recent declines. As of Tuesday, the index SPX has down 2.9% from its record closing on June 2.
In terms of what would make the strategist more optimistic, he would want to see those significant impending initial public offerings (IPOs) “get digested well in markets” and lower stock prices to help remove some of the investor excitement from the market.”Another thing he’d like to see: real yields easing off.”He stated, “I do think that would also provide the tailwind if the Fed chair has the ability to try to jawbone those lower and provide some assurances.”
