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Why the Stock Rally Has Peaked, According to Stifel

Despite the stock market’s more than 16% gain since hitting a low in late December, the rally may fizzle and go nowhere for the rest of the year, according to Barry Bannister, head of U.S. equity strategy at Stifel. The market watcher attributes his bearish forecast to headwinds including slowing earnings growth, a strengthening U.S. dollar, weak global growth and the threat of an inverted yield curve, per CNBC.

"The earnings growth is not that much this year, so the market is fairly valued and that's the trouble for upside here," said the market watcher. When it comes to earnings, Bannister forecasts the S&P 500 to pull in $165 in earnings per share this year, lower than the nearly $170 estimate compiled by FactSet. Bannister's forecast implies 3% earnings growth for 2019, representing just half the growth that analysts on the Street expect.

Stocks in 2019

(YTD performance)

  • S&P 500 Index; 8.7%
  • Dow Jones Industrial Average index; 8.2%
  • Nasdaq Composite Index; 10.7%
  • Russell 2000 Index; 12.5%

Stocks Trading at Fair Value

While the market has surged since plunging in late 2018, Bannister suggests that upside is limited. He points to stock valuations, indicating that the “price to earnings multiple is about right where it should be,” suggesting that the market is fairly valued at this point. "The difficult dollar comparisons [and] weak global growth have really weighed on the growth this year, and if earnings growth this year were only 5%, the price-to-earnings multiple should be around 16, 17 times. There's not a lot of upside at this point," he added.

Bannister’s year-end price target for the S&P 500 at 2,725 reflects a nearly flat run from Monday close, with the S&P 500 up about 0.7% at 2,724.87.

Fed Policy

While the market has eased back on fears of tightening monetary policy, thanks to recent announcements from the Fed, Bannister notes that Fed rate hikes and the potential of an inverted yield curve are some of the biggest risks facing the rally. The yield curve inverts when a shorter-term bond yields higher than a longer-term bond. In such a case, the Stifel analyst recommends so-called bond proxy stocks that offer high dividend yields.

“Some of the staples, most of the utilities, do look like a good defensive trade if the Fed has indeed over-tightened,” said Bannister. He suggests staying away from industrials, cyclicals and materials if the yield curve does invert.

"It's kind of what you avoid not so much as what you own if there is going to be a slowdown that really blows back on the U.S..” he stated.

Bannister’s downbeat comments come as other market watchers argue that the market is in a "bull trap," much like 2000 and 2007, and will pull back sharply, according to a column in MarketWatch.

Similarities to 2000, 2007 Tops

Reporter Sven Henrich makes the case that the current market shares many common and concurrent elements with the previous two big marker tops. Among them include events such as new market highs tagging the upper monthly Bollinger band on a monthly negative RSI, a steep correction off the highs that breaks a multi-year trend line, and a turning of the monthly MACD (Moving Average Convergence Divergence) toward south and the histogram to negative. Such events have coincided with a reversal in yields, a sudden halt by the Fed in amid the rate hike cycle, and an extended trend of lower unemployment – signaling the coming end of business cycle.

“As long as SPX remains below its 200 MA without a confirmed breakout above the confluent set of elements discussed above, there is well-founded risk that this market can still turn into a full-fledged bear market. After all, economic growth is slowing, earnings growth is slowing and the last three times the Fed halted its rate-hike cycle a recession soon followed,” wrote Henrich.

Looking Ahead

It’s important to note that Stifel’s bearish outlook is opposite to that of many bulls on the Street, such as Goldman Sachs, which expects stocks to rise sharply through year-end. 

Stifel's view reflects the tug of war in the market over whether we are moving toward a bear market or remain in the middle of a long-term rally. This makes it more important than ever for investors to position their portfolios for a wide range of scenarios - and be willing to adjust quickly.