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Consumer expectations for stocks hit 3-year high in May
Consumers have been more optimistic about the outlook for stocks since May 2021.
The most recently consumer expectations survey from the Federal Reserve Bank of New York showed that the average perceived probability that stocks will rise over the next 12 months rose to 40.5% in May, up from 38.7% in April.
The survey also showed that consumer expectations for inflation next year fell to 3.2% in May, from 3.3% in April. Overall, the New York Fed found that households felt better about their financial situation, as more respondents reported being “better off than a year ago,” while fewer respondents noted they were “worse off.” .
Optimistic consumer sentiment occurs when stocks are close to records. The S&P 500 (^GSPC) is up more than 12% this year, while the tech-heavy Nasdaq Composite (^IXIC) increased by more than 14%.
One increasingly positive corporate earnings outlook he has prompted several analysts to update their year-end targets for the S&P 500. The year-end target for the S&P 500 rose to 5,600 from 5,200 at the start of the year.
The enthusiasm raises the question of whether the market is becoming turbulent. Typically, when Wall Street becomes overly optimistic, it often signals the peak of a market rally, according to research from Bank of America.
But in a research note published on Monday, Savita Subramanian, head of equities and quantitative strategy at Bank of America, noted that the sentiment is “not euphoric.” Bank of America’s Sell Side indicator, which tracks Wall Street strategists’ recommended allocation to stocks, rose to 55.3% in May, which the bank’s ratings are still “neutral.” A reading of 58% or higher would normally be a sell signal.
Bank of America’s sell-side indicator shows that Wall Street has not yet reached a level of extreme optimism in the midst of the market recovery. (Bank of America US Quantitative and Equity Strategy)
Others on Wall Street are particularly concerned about what is being included in the current bull scenario. Markets currently see about two interest rate cuts this year, largely based on the argument that inflation will continue to decline through 2024. Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, wrote in a notes to clients on Monday that its team remains concerned that “market participants have become a little too optimistic about the timing of the cuts.”
Calvasina’s model predicts that the S&P 500 should be at 5,300, given current consensus views on inflation and economic growth. That’s roughly in line with the roughly 5,341 the S&P 500 opened on Monday. The risk, notes Calvasina, is if the history of inflation continues to be unstable and it doesn’t work as well as investors currently expect.
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“There is some modest downside risk for the U.S. stock market if the Fed does nothing this year and inflation is stickier than expected,” Calvasina said.
In this scenario, Calvasina believes that the S&P 500 could fall to 4,900, representing a decline of around 8% compared to current levels.
A man sits on the Wall Street bull near the New York Stock Exchange (NYSE) on November 24, 2020, in New York City. (Spencer Platt/Getty Images) (Spencer Platt via Getty Images)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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