The stock market has soared this year, with the S&P 500 index hitting 41 closing highs and jumping 20%.
The market’s latest boost came from the Federal Reserve, which last week slashed interest rates by one-half percentage point. Lower rates generally stimulate the economy, thereby boosting corporate earnings.
JoAnne Feeney, a veteran portfolio manager at Advisors Capital ($8 billion of assets under management), is optimistic about the economy. It’s “in pretty good shape,” she wrote in a commentary.
More rate cuts are expected. Those reductions will help stocks this time around, but not in the usual way, she said.
Historically, once the Fed starts lowering rates, value stocks outperform growth stocks, and defensive stocks outperform cyclicals. But that has generally happened when the Fed cut rates into a weak economy, Feeney noted.
Fund manager says consider companies that borrow
Now, rate cuts will benefit companies that rely on borrowing. That includes small companies, technology companies and biotech companies, she said. “Those firms most reliant on sourcing external financial capital will likely gain the most.”
Other sectors poised to thrive are industrial, health-care and consumer discretionary stocks, Feeney said. Laggards will likely include consumer staples and utilities.
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Earnings from the S&P 500 companies surged 11.3% in the second quarter from a year earlier, according to FactSet. While analysts expect that growth to decelerate to 4.6% in the third quarter, that’s still a solid number.
But bears see pitfalls on the horizon, contending that stocks are overvalued. As of Sept. 20, the S&P 500 traded at 21.4 times analysts’ earnings forecasts for the next 12 months. That’s well above the five-year average of 19.5 and the 10-year average of 18.
Economist David Rosenberg is negative on stocks, economy
Veteran economist David Rosenberg is often bearish on equities, and that’s certainly the case now. “The stock market is already in a price bubble,” he told MarketWatch.
“There’s a lot of optimism being priced in about what earnings are going to deliver over the next couple of years. Stock investors should be concerned about recession and a lower earnings stream.”
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If you are going to buy stocks anyway, “you want to be in sectors that perform well in a period of slower growth, lower inflation and lower interest rates,” Rosenberg said.
That includes utilities, telecom services, real estate, financials and dividend-paying growth stocks with high payout ratios, he said.
Goldman Sachs mildly bullish on stocks
Meanwhile, Goldman Sachs strategists, led by David Kostin, are mildly bullish on stocks. "With [price-earnings] multiples flat, earnings growth will lead the S&P 500 modestly higher,” they wrote in a commentary before the Fed’s rate cut.
On Sept. 24 Kostin, Goldman’s chief U.S. equity strategist, confirmed Goldman’s pre-rate-cut forecasts for stocks in an interview with Bloomberg.
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That includes a year-end target of 5,600 for the S&P 500 and a 12-month target of 6,000. The latter represents a 5% gain from Wednesday’s level of 5,720.
Kostin likes midcap stocks, as they outperform large-cap and small-cap stocks long term, have lower valuations and are often ignored by portfolio managers. “That’s an area that really is likely to outperform over the coming year,” he said.
Related: Veteran fund manager who correctly forecast stock drop updates outlook
