Perfect Storm Threatens Bull Market after Rallies on Fed, Trade Talks

Investor expectations of Fed speed cuts and a U.S.–China trade deal have sent stocks surging within a hair of their all-time highs. But a few market strategists say these gains are likely to be illusory and short term. Instead, a perfect storm is brewing that could hammer objectivity markets in the second half of the year as four major headwinds gather strength, including weaker than watched earnings, a halt to massive stock buybacks, fewer than expected rate cuts, and growing turmoil from Brexit and other convulsions in Europe, according to macro strategist David Deluard at INTL FCStone, per a exhaustive story in Business Insider.

“Rate cuts, a fairly resilient economy, high earnings beat rate, and the brand-new pullback of valuations will convince some investors to buy the dip,” wrote Deluard in a note to clients. However, “Stock deal in declines will resume in the fall, with a perfect storm of negative events,” he added.

Deluard is not the only skeptic. A Bank of America Merrill Lynch scrutiny shows investor bearishness is at its highest levels since the financial crisis 10 years ago “with pessimism made by trade war and recession concerns,” according to chief investment strategist Michael Hartnett. And strategists at Morgan Stanley say the hazard of a recession and steep market plunge have increased sharply.

These bearish forecasts come as the major indicators have posted strong gains in June, and jumped again on Tuesday on hopes of an imminent U.S.-China trade have to do with. The latest catalyst was news that President Donald Trump will hold an “extended meeting” with Chinese President Xi Jinping at the G-20 convention next week.

The big risk is that any U.S.-China trade deal could fall far shy of of investor expectations or that the conflict could drag on. For his part, macro strategist Deluard says continued patrons tensions risk hurting corporate profit margins. If those margins fail to expand, investors should be able for weaker forward guidance in Q2 earnings reports or else be disappointed by weaker than expected earnings in Q3 and Q4. Downward earnings editings in the past have been detrimental to share prices. 

In addition, Deluard says that buybacks, which press played a major role in bolstering the stock market, will be reduced during earnings ‘blackout’ periods when comrades prohibit purchases of their own shares. While this pause occurs every earnings season, heightened job tensions and the fading influence of Trump’s tax plan could intensify the buyback ‘blackout’ effect. 

And while markets are currently figure up to three rate cuts, Deluard believes the current rate of inflation warrants just two cuts. If the Fed fails to forgather market expectations, expect to see stocks correct to the downside.

Within Europe, Deluard also says the stock troop could become unhinged by several forces, including how the European Commission deals with Italy’s ‘excessive’ default, the expiration of Mario Draghi’s term as president of the European Central Bank (ECB), and the very real possibility that a ‘no-deal’ Brexit require occur. 

In its latest bear-case forecast, Morgan Stanley presented a bleak scenario should the U.S.-China merchandising conflict worsen. In the 20% chance that this scenario occurs, Morgan Stanley expects the S&P 500 to sink to 2,400 over the next six to 12 months, the U.S. economy to enter a full-blown recession by 2020 and earnings growth to hit a in the final of negative 14% in 2021.