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Fed’s pivot is forcing stock-market skeptics to become believers


The Federal Reserve’s dovish policy pivot is cornering even the most steadfast Wall Street bears into changing their tune on US equities.

Morgan Stanley’s Mike Wilson, who’s been one of the biggest pessimists among sell-side strategists, said Monday that the central bank’s shift last week is “a bullish outcome” for stocks. Piper Sandler & Co’s Michael Kantrowitz — who held the most glum S&P 500 Index outlook this year — issued a mea culpa and now says the rally can continue, and the breadth of the advance is likely to improve.



The admissions from these usually gloomy forecasters mark a turning point after they advised clients to stay cautious on US stocks this year — even as the market surged toward double-digit gains that have left major indexes at or near record highs.

Heading into 2023, prognosticators had warned that higher rates would tip the economy into recession and erode corporate earnings, spurring an equities selloff. Instead, the labour market, consumers and US firms have been resilient, propelling the S&P 500 to a roughly 24% advance.

Some strategists still dug in their heels, saying that the lagged impact of elevated borrowing costs would eventually deliver a reality check to investors. After Fed officials signaled last week that their hiking campaign is likely over and projected cuts next year, it’s made it harder to stick to those warnings.

“I was wrong this year on absolute returns for equities by a lot,” Kantrowitz said Friday in a note to clients as he acknowledged that a Fed pivot has clear bullish historical precedence. “I’m trying to remain open-minded, stay with history and my framework, and be willing to swallow my ego and not remain stubborn.”

After broadly getting it wrong this year, Wall Street strategists have gotten more optimistic on equities heading into 2024. Firms including Bank of America, Deutsche Bank AG and BMO Capital Markets are among those predicting the S&P 500 will hit or top 5 000. Still, the consensus view has remained conservative, with the average call of just above 4 800 for next year implying a meager gain of around 1% from here.



Now some firms are going back to the drawing board. Goldman Sachs Group increased its year-end S&P 500 target one month after setting it, with strategist David Kostin seeing the gauge rise to 5 100 points by the end of next year, almost 9% above the 4 700 level he predicted in mid-November.

But while Morgan Stanley’s Wilson called the Fed’s pivot “welcome news to equity markets,” he hasn’t done a complete about-face. He left his S&P 500 target at 4 500 for next year, implying a 5% drop from Monday’s close.

“This is a bullish outcome for stocks because it means the odds of a soft landing outcome have gone up if the Fed is going to start focusing more on sustaining growth rather than worrying so much about getting inflation all the way down to its 2% target,” Wilson said. “That’s not to say this dovish shift doesn’t increase the risk of inflation reaccelerating down the line.”

© 2023 Bloomberg

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