Increasingly bullish investors may be trying to convince themselves it’s okay to buy stocks after the rise, Citigroup says



Many portfolio managers are increasingly bullish, even as the stock market is trading around historic highs, according to Citigroup Inc.

“Investors want markets to rise higher, pointing to the reality that investment professionals are paid to participate and not to sit and wait for better entry points,” Citi analysts said in a statement. research note published at the end of last week. “Therefore, they have to convince themselves that everything is fine. “

Meanwhile, the share of companies in the S&P 500 SPX,
+ 0.35%
which “steadily” beats the benchmark stock market fell sharply in the second quarter, according to the report. The Citi Research rating chart shows that only around 10% of the index’s constituents outperformed the S&P 500 by 10% in this period, compared to over 30% of the constituents in the first three months of this year. .

“We find investors too comfortable with the fact that valuation is only a function of low interest rates, even though equity risk premiums are significantly higher than usual levels before the global financial crisis,” said the Citi analysts in the report. “The removal of interest rates means that the Fed’s or the ECB’s forecasts for sustainable GDP expansion are not particularly convincing.”

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The US stock market closed last week at record highs, with the S&P 500, the Dow Jones Industrial Average DJIA,
+ 0.36%
and Nasdaq Composite COMP,
+ 0.21%
maintain their lead in Monday afternoon trading, FactSet data showed during the last check.

“We regularly receive reluctance from more bullish investors who tell us that earnings and liquidity are arguing for a rise and that we are too worried,” Citi analysts said. “As a result, the concept of ‘this time is different’ is palpable and bewildering.”

Meanwhile, the Federal Reserve kept its benchmark interest close to zero, signaling at its policy meeting in mid-June that a take-off could take place in 2023 based on the median forecast from Fed officials. After the meeting concluded with what many investors and analysts saw as a hawkish fulcrum, Barclays raised expectations for the Fed to start cutting back on asset purchases as part of its quantitative easing program as early as this. year.

Still, the yield on the 10-year Treasury bill has fallen since then amid concerns about spike in growth and as some market analysts point to technical factors such as short hedging. The 10-year rate TMUBMUSD10Y,
1.365%
was around 1.37% in Monday afternoon trading, down from around 1.57% on June 16, the day the Fed’s meeting closed.

See: Is inflation absorbing all the interest you earn on 10-year treasury bills?

Meanwhile, the S&P 500’s rise this year “far exceeds median or average returns,” according to the Citi report.

The S&P 500 gained about 15% through July 8, rising about 8.2% in the second quarter and about 5.8% in the first three months of 2021, according to the report. The median performance of the S&P 500 in the first half of the year since 1900 is 3.8%, according to Citi.

Analysts also weighed in on this year’s standoff between growth and value stocks, with the Russell 1000 Value RLV Index,
+ 0.36%
late in Q2 after beating the Russell 1000 Growth RLG,
+ 0.20%
index in the first trimester, according to the report.

“We continue to believe that a rally in the value of the ‘last hurray’ is likely” as the economy continues to reopen after the pandemic, Citi analysts said.

Yet, amid a broader concern that “complacency breeds risk tolerance,” analysts have said that “we are on the side of caution at this point, although we are not in a position to determine how much. exact cause of the next withdrawal ”.

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