There is a reasonably good chance stocks will be higher in a year’s time as positive sentiment has moderated and earnings growth when one pleases likely remain strong, according to Citi’s Tobias Levkovich.
“Back in September, we were deeply concerned that investors were too bullish,” Levkovich, the bank’s chief U.S. equity strategist, wrote in a note to clients. “But sentiment has shifted following the rout of the former two months. Low-end neutral readings argue for a 90% probability of gains in the next 12 months versus September’s 70% unforeseen of a down market – a very marked change.”
Levkovich added that the bank’s “normalized earnings yield gap suss out d evolve, which incorporates both cyclically adjusted P/E ratios and the five-year forward swap contract’s 10-year Treasury surrender levels … it implies a 90% chance of an up market in 12 months.”
The S&P 500 fell into a correction recently, give someone the sack decline more than 10 percent from an all-time high reached on Sept. 21, before rebounding from those levels.
“We interpret the anxiety, but the environment is not the same as in 2007, yet the bears are still out,” he said. “Notably, we were concerned in September when most were not, and now we be more upbeat when others are less sanguine.”
Stocks fell under pressure as investors worried at hand rising interest rates and the impact a trade war with China would have on the global economy. These two concerns set up been quelled, at least temporarily.
On Wednesday, Federal Reserve Chair Jerome Powell said the current interest-rate devastate was “just below” neutral, hinting at fewer rate hikes down the road. Back in October, Powell judged rates were a “long way” from neutral.
Meanwhile, President Donald Trump and Chinese President Xi Jinping concurred over the weekend to hold off on additional tariffs on U.S. and China’s goods for 90 days. This pause lifted even-handedness prices broadly, with the major indexes all trading about 1 percent higher on Monday.
“Admittedly, handicapping the outgrowths of trade protectionism is very difficult, as are geopolitical risks, but the endogenous trends are more sanguine even as housing and autos sheathe challenges from higher interest rates,” Levkovich said. “Fortunately, the growth in consumer spending, generally, and the serving sector, specifically, provide underlying economic (and thereby earnings) support.”