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The runaway train that is the U.S. stock market has moved so far and so fast that some investors are wondering whether they can get off without breaking a limb.
It’s a complicated maneuver. As key markets prepare for a long weekend, the S&P 500 index of U.S. blue-chip stocks ended the first quarter of this year with a 10% gain, on top of rising 11% last quarter of 2019. last year.
Some European indices, such as the German Dax and the Italian FTSE MIB, can match or even beat this value in local currency terms, and Japan remains in go-go mode. The UK’s FTSE 100 is also approaching its record high, with all the grace of Mr Bean on ice skates, in a force 10 storm, carrying two bowls of custard, in the dark. A win is a win, but at around 3%, first quarter gains are much more modest.
But the scale of the US rise and the enormous weight of market capitalization that supports it (Apple alone is almost double the Dax, for example) means that this is the thing that matters. And it seems unstoppable.
Goldman Sachs is even outlining a plausible path for the S&P 500 that could go as high as 6,000, about 14% above the current level, if “megacap exceptionalism” continues unabated. That’s not the bank’s base case, but with the 5,200 target for this year already in the rearview mirror, chief U.S. equity strategist David Kostin is laying it out as a potential framework for superbulls.
“The weirdness continues,” said Andrew Pease, chief investment strategist at Russell Investments in London. “The way things have changed is strange.” The shocking shift in market expectations for interest rate cuts by the Federal Reserve – from six cuts expected at the start of the year to three now – has failed to dent stock market performance.
Money managers with a more pessimistic view of where markets were going were increasingly giving up and jumping ahead, Pease said, which grates on the nerves of those who wonder whether we’ve gone too far. But given his long-term goal, with many pension fund clients, he is not pushy enough to request intervention. “It’s hard to have a strong vision right now,” he said.
“This will all end when the last drop has been dragged in, which hasn’t happened yet, or the market gets hit with a piece of information – and that could be for a while yet.”
This sentiment also emerges from the French Edmond de Rothschild Asset Management, which recently reduced its equity exposure, bringing it slightly underweight compared to the benchmarks. “It wasn’t an emergency to reduce risk,” said Benjamin Melman, chief investment officer of the family-run group. But he is “perplexed” by the market’s willingness to ignore signs of rising inflation in the United States and unnerved by what he called a “frizzy environment” dominated by a glassy faith in American exceptionalism.
“Investors in the United States are convinced that the US technology sector cannot be challenged,” said his colleague Jacques-Aurélien Marcireau, who has covered global technology for 15 years. “European investors are more afraid.”
So the dilemma is quite clear. Investors – professional or retail – can decide that the trend is their friend and stick with something their gut says seems excessive, or take a heroically contrarian call that the rally is about to end in tears and bet on a decline . The latter is a particularly painful bet to get wrong.
One investment house that knows this sentiment is GMO, famous for its warnings over the years about “meat grinder” crashes headed toward US stocks. Now, Ben Inker, co-head of asset allocation there, says there’s “a lot we’re excited about,” but not in the popular places.
“It is increasingly difficult to get excited about owning the S&P 500 due to the index’s positive performance and high valuations,” he said. “There’s no guarantee that US megacaps will go down tomorrow, just when you look at them, we think you’re not going to see really good returns from here.” He is instead looking at “deep value” stocks in Europe and elsewhere which he believes present some surprising opportunities.
As Inker acknowledges, if big U.S. stocks fall for any reason, the cheaper parts of the global stock market will also fall. So, to some extent, these are two sides of the same coin.
All of this means that, especially as the US first-quarter earnings season approaches in April, investors are entering a delicate phase. “The best asset managers don’t say ‘I’m king of the world’ and throw money everywhere,” said Alain Bokobza, head of global asset allocation at French bank Société Générale. “They are still rigorous and disciplined.” All roads still lead to the United States, he said. He believes the index will head towards 5,500 if the macro environment remains broadly stable and bond markets remain calm and calm.
But the constant upward push in U.S. stocks is “dangerous” because it is such an entrenched consensus trade, he said. “If you keep doing that, you’re not being careful, so it depends on when you turn on risk reduction. This is the art of asset allocation.”
katie.martin@ft.com