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As the slide in stocks continues into early 2023, the outlook for stocks remains bearish over the medium term, according to Wolfe Research.
The Nasdaq 100 (NDX:IND) (QQQ) has risen 9% YTD, while the S&P 500 (SP500) (NYSEARCA:SPY) has risen by 4.6%.
“While several short-term technical indicators are currently in ‘overbought’ territory, we would not be surprised to see additional near-term upside given the strong momentum behind the recent breakout,” chief investment strategist Chris Senyek wrote in a statement. note.
“We attribute the latest stage of this ‘melt’ to rising expectations that the US economy will slide into a ‘soft landing’ while the Fed embarks on a protracted cut cycle at the same time,” Senyek said. “However, with the Fed still very concerned about a 1970s-style resurgence of inflation, we see two possible paths ahead: (1) there is a ‘soft landing’, but the Fed goes above 5% and stays there through at least 2024, or (2) the Fed ends up cutting this year, but it’s because the US is approaching a deep recession.”
“Either way, there are bound to be big disappointments!”
“The more speculative areas of the US equity market have also picked up some serious bidding, another strong indication that the market expects the Fed to change course quickly and sharply later this year,” Senyek said.
Wolfe’s short chart is up 19% year-to-date, while the ARK Innovation ETF (ARKK) is up 29% and the Renaissance IPO ETF (IPO) is up 17%.
But there are “much more downside gains ahead” if the United States enters a deeper-than-expected recession, Senyek said.
“While we’ve received quite a bit of pushback on our EPS outlook for technology (XLK) and banks (KBE), we believe earnings from both areas remain highly cyclical.”
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