Mixed Economy Investments: Bank of America's 2024 Strategy

Goldman Sachs identifies an upcoming trade in stocks

Stocks have bounced up and down quite a bit in recent weeks. The S&P 500 index jumped 8% from 5,235 on May 30 to a record close of 5,667 on July 16. Then, it lost 8% through Aug. 5. And since that date, it has rebounded 3% to 5,343. Through it all, the S&P 500 remained up year to date -- 12% as of Monday. On the plus side, anticipation of interest-rate cuts from the Federal Reserve, optimism about corporate earnings, and the economy's resilience boosted equity prices. On the downside, concern that the economy will weaken markedly, disappointment that mega-cap technology companies didn't meet analysts' outsized expectations for second-quarter earnings, and a pullback of market mania over artificial intelligence weighed on stocks. So, where does that leave us now? Valuations appear stretched. According to FactSet, the forward 12-month price-earnings ratio for the S&P 500 stood at 20.2 as of Aug. 9, well above the five-year average of 19.4 and the 10-year average of 17.9. But bulls point out that the current P-E ratio is significantly lower if we exclude the Magnificent Seven stocks -- Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. One money manager's bullish opinion JoAnne Feeney, a portfolio manager at Advisors Capital Management, isn't overly concerned about valuations or stocks' recent correction. Since their mid-July record peaks, the Nasdaq Composite has lost 10.2% and the S&P 500 5.7%, she noted. Related: Cathie Wood buys $59 million of pummeled tech stocks "Declines of these magnitudes occur most every single year. When we dig under the surface to the earnings power of companies across the market, we find more encouraging signs for equities, despite last week's events." Feeney isn't worried about recession, with the economy expanding 2.8% annualized in the second quarter and the Atlanta Fed's forecasting tool calling for 2.9% in the third quarter. "We seem to be approaching a soft landing.... A recession, this is not," she said. A soft landing combines low inflation with moderate economic growth. Investors were disappointed that second-quarter earnings reports from mega-cap tech companies didn't show financial benefits from all their spending on AI. But, it's "far too soon to expect much of a boost to sales and profits from AI," Feeney said. "The productivity-enhancing effects are unlikely to appear for at least several quarters and maybe years. Companies must figure out how to deploy that AI." Related: $271 million fund manager picks 3 best-of-breed stocks, including Chevron She's encouraged by the earnings outlook outside of the Magnificent Seven. The other 493 S&P 500 companies are on track to deliver earnings growth of 7.4% for the second quarter, according to Bloomberg Intelligence, Feeney said. That would mark their first quarterly profit growth in the last six quarters, she said. "That's a plus for equity investors." Goldman Sachs: A window to snag stocks Meanwhile, many experts recommend against trying to time the stock market. But Scott Rubner, managing director of global banking & markets for Goldman Sachs, sees a window for snapping up equities between Aug. 30 and Sept. 6. "We are ending the worst of the equity supply and demand mismatch for August, and this is inning 8 of 9 of the [market] correction in baseball game terms," he wrote in a commentary. "I am so bearish on the global macro environment that I am turning tactically bullish on equities on Aug. 30." The dumping of stocks will abate, curbing supply, Rubner said. "The expected continuation of equity supply from systematic macro strategies may take until next week to fully clear." Related: Cathie Wood buys $59 million of pummeled tech stocks He's referring to traders, largely hedge funds, who buy and sell according to computer algorithms- sell in this case. "However, I have seen enough evidence and reduction in positioning that the worst market technicals are behind us," Rubner said. "Total exposure has overshot to the downside." On the economic front, Goldman has become more concerned about the possibility of recession amid signs of economic weakness. They estimate the chance of a downturn to be 25% for the next 12 months, up from 15% previously. To be sure, "we continue to see recession risk as limited because the data look fine overall, we don't see major financial imbalances, and the Fed has 525 basis points of room to cut [interest rates] to support the economy," Goldman's chief U.S. economist David Mericle wrote in a commentary. Related: Veteran fund manager sees world of pain coming for stocks

2 trades to make now amid 6 economic pitfalls ahead, according to a Bank of America chief strategist

This story is available exclusively to Business Insider subscribers. Become an Insider and start reading now. Have an account? Log in. Six key concerns are tugging at investors' minds right now, but each is unwarranted, according to Quinlan, who broke them down and shared his thoughts. The first concern is that the market is afraid the Federal Reserve is behind the curve on cutting interest rates after keeping them too high for too long. However, fears that this could lead to a recession are overblown. The economy is slowing, but it's not stalling, and the central bank is on track to cut two or three times this year, he noted. "The employment market is so important because employment equals income, income equals consumption, and consumption is around 70% of US GDP," Quinlan said. But he noted that even as July's unemployment rate ticked up to 4.3%, it's still historically low and pretty strong relative to other countries. The second concern is that US and Chinese consumers are retrenching. While spending is slowing, what's really happening is that the consumer is normalizing. However, the squeeze of inflation is being felt, especially for lower-income households, he added. The impact will be felt in certain sectors more than others. More tightness could come from the Chinese consumer. China has been trying to reopen for the last 18 months, and it's not happening, he said. Plus, the Chinese property and equities markets are underwater, which has created a negative wealth effect. There's also a high unemployment rate among college graduates and a lack of jobs, he added. "You could see some weakness in consumer staples, particularly consumer discretionary," Quinlan said. "You've seen the airlines add a lot of capacity, but the flyers aren't there. You see hotels having to maybe start discounting. You need to watch where the capacity or supply has been added, but the demand is not there, then you start discounting, which means lower profit margins going into Q3 and Q4. So that's kind of what we're watching out for." The third concern is the unwinding of the artificial intelligence trade, mainly the Magnificent Seven. Here, Quinlan noted that the pullback was to be expected and healthy as the sector got frothy. This earnings season was rich in guidance and uncovered key trends for Big Tech. One of these was the overarching theme of continuing to spend billions of dollars on AI infrastructure. The potential rate of return on all that capex has impatient investors questioning their bets. They want sooner returns, but the AI trade will take years, not quarters, he said. The fourth concern is the recent unwinding of the yen carry trade. Japan's low interest rates made its currency a cheap option to borrow and fund other trades in the US and worldwide. But those arbitraging the yen found themselves getting squeezed as the Japanese central bank raised rates. The unwinding process saw parts of the market, specifically tech, sell off as investors rushed to repay the loans. While no one knows where the bottom is, Quinlan believes the worst is over. The fifth concern is uncertainty surrounding the US election. At the beginning of the race, it seemed likely that Donald Trump would win. Polling predicted that the former president had a good lead, particularly in swing states. But that's off the table now, and we're right back to a tight race, Quinlan said. Increased uncertainty also means increased volatility. So there's $6 trillion sitting in money market funds that is being held hostage to politics, he added. "I speak with clients every day. They're happy getting 5% out of the money market bonds until they see some clarity, more certainty in and around the election," Quinlan said. "They expect more volatility, particularly post-Labor Day, because it's going to get tight; it's going to get pretty interesting. Policies are going to be dissected." Quinlan emphasized that any significant stock market dips below 5% are buys.. He doesn't advise trying to time the market by selling with profit-taking intentions. One punishing day could be followed shortly after by some nice upside, he noted. The final concern is rising geopolitical tensions in the Middle East. For Quinlan, this has translated into a strategy of being long the leaders of US defense, aerospace, and cybersecurity. The escalating conflict between Israel and Iran ups the ante of a greater regional conflict that makes investors nervous, and defense is a key winner of that, he said. If investors want to skip the volatility that accompanies an uncertain economic environment, then one of the best places to park money is still in bonds with durations between two and 10 years, he said. "We've had these episodes of market volatility in the past, and the only path was in and out of equities," Quinlan said. "Well, now you get 4% even on a two-year yield; that's a good place to put some money to work as you're waiting out this volatility. Remember, as interest rates come down, you lock in two-, five-, or 10-year yields. You're not locking in anything by owning cash. Those money market funds are going to come down as the interest rates come down." He also likes small-cap companies across the board. Even though the Russell 2000's rally in mid-July didn't last, he believes the sector will have its day. Smaller companies are more credit-sensitive. If you combine dropping rates with a soft landing, this sector of the stock market is well positioned for upside, he said. "We're still believers in that small-cap trade. So don't give up on that if you don't have exposure, add to it," Quinlan said.