Take advantage of this stock market correction and another quarter of strong earnings by making these 10 moves now, according to top strategists at 4 investment firms
- Stocks have fallen significantly this autumn, but top strategists aren’t deterred.
- Better-than-feared earnings can carry the S&P 500 higher after an ugly market selloff.
- Here are 10 smart ways to invest, according to four investment firms.
The terrifying fall in US stocks has not deterred the investment heads of four major research firms.
Following a dreadful two months for markets, top strategists at Bank of America, UBS, Oppenheimer, and Truist are all bullish on stock fundamentals. The S&P 500 has fallen 7% since the beginning of September, briefly entering correction territory from its summer high last week.
Fears of higher-for-longer interest rates in a still-hot economy weighed on stocks this fall. Investors are divided on whether a recession will occur, but even if the US avoids a downturn, there is a risk that inflation will persist, putting even more pressure on consumers.
Still, no concern is more serious than Israel’s and Ukraine’s geopolitical conflicts. Fighting in both regions has claimed an incalculable number of lives and has the potential to worsen.
However, strategists believe that while these risks are mostly priced into stocks, higher earnings are not.
Earnings are strong, but investors aren’t getting the message.
Corporate profits are on track to outperform Wall Street’s low expectations once more, according to investment executives.
In a late October note, Savita Subramanian, the head of Bank of America’s US Equity Strategy unit, wrote that third-quarter earnings are up about 3% from 2022, with results from roughly half of the S&P 500 firms in the books. That’s significantly higher than the flat consensus estimate she mentioned.
After three consecutive quarters of declining profits, both BofA and UBS expect earnings to increase by at least 3% year on year in Q3.
“Earnings are set to return to growth,” Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management, wrote in a note dated October 30. “The percentage of companies beating earnings estimates is in line with historical averages (around 73%), and earnings are beating forecasts, in aggregate, by nearly 8%.”
However, Marcelli’s colleague, UBS US equities head David Lefkowitz, wrote a few days ago that investors have ignored the good news and are instead focused on the Federal Reserve and Israel.
“Despite a generally fine earnings picture, equities responded quite poorly this week,” Lefkowitz said in a note. “At the margin, we are seeing some weakening in EPS revision momentum, but the market reaction appears overdone, in our view.”
Oppenheimer Asset Management’s chief investment strategist, John Stoltzfus, echoed that sentiment.
“Even as economic and corporate earnings resilience have persisted since the end of July, market sentiment soured on stocks as market-priced interest rates moved higher and geopolitical risk ramped up,” Stoltzfus wrote in a note to clients on October
Stoltzfus appears to be in the glass-half-empty camp at first glance, given that he recently reduced his S&P 500 price target by more than 10%. However, the bullish strategist simply restored his previous target after raising it during the peak of US stocks in early August.
“We are revising our year-end price target for the S&P 500 to 4,400 from 4,900 to reflect the S&P 500’s three-month sell off pushing the benchmark last week to correction levels,” Stoltzfus said in a statement. “We remain constructive on equities.”
Keith Lerner, Truist’s strategist chief and co-chief investment officer, is neutral on US stocks but agrees with his colleagues that the group is more appealing following the recent market selloff.
“Within the context of our expectations for a continued choppy backdrop, we are incrementally more positive,” Lerner said in a late October note. “With the recent pullback, markets now better reflect some of the many uncertainties that persist.”
“We see the recent pullback as an opportunity to add for those investors underweight equities,” Lerner added later. In the larger context of a choppy range, the weight of the evidence in our work is skewing more positive.”
Lerner wrote that Truist’s more positive outlook on stocks is based on strong results so far in Q3.
“Although the market has not reacted favorably to the earnings season, likely in part due to a focus on the reset in interest rates, forward earnings estimates just reached another record high this year for the S&P 500,” Lerner said in a statement.
Traders should be encouraged not only by improving fundamentals, but also by promising technicals.
The S&P 500 bounced off 4,100, which Lerner noted was an extension of a critical support level, and it is now entering the seasonally strong months of November and December. And, after outperforming the rest of the market, the so-called “Magnificent Seven” have recently taken a beating, which Lerner believes is a sign that a drawdown is nearing an end.
“The setback has been deeper outside of large caps, with the average stock, as proxied by the S&P 500 Equal Weight Index, down 13%, small caps down 18%, and Real Estate down over 20%,” Lerner said in a statement. “This suggests to us the correction is further along than many recognize.”
10 Best Places to Invest Right Now
These investment firms provided advice on where to put their money in addition to providing information on the trajectory of US stocks and corporate earnings.
Bank of America strategists currently rate four sectors as bullish or overweight: consumer discretionary, energy, financials, and real estate.
The Charlotte-based firm believes that discretionary stocks are well-positioned because consumers have performed admirably and are now benefiting from positive inflation-adjusted wage growth. It expects energy to rise as a result of higher oil prices caused by geopolitical conflicts, and it is bullish on financials and real estate, in part because the sectors are cheap in comparison to history.
Oppenheimer agrees with BofA’s consumer discretionary call, but believes the other three sectors will perform in line with the market as a whole. Instead, it is bullish on industrials and information technology stocks, reflecting its recommended tilt toward cyclicals.
Stoltzfus wrote that continued economic growth and diversification of global supply chains will lift industrials, and that tech firms are entrenched with consumers and businesses through their products and services, making them consistent long-term performers.
Due to the group’s promising technicals and fundamentals, Truist has three overweight-rated sectors: the aforementioned energy and industrials, as well as communication services.
Truist prefers large-cap stocks over sectors in the medium term. If Lerner’s prediction that US stocks are nearing a bottom is correct, investors should also allocate money to small caps and the S&P 500 Equal Weight Index for solid near-term gains.
Finally, UBS is optimistic about energy and technology stocks. Mark Haefele, the firm’s investment chief, wrote in a mid-October note that energy companies have appealing valuations and can serve as a hedge against geopolitical risks. He also stated that internet and software companies are good long-term investments as the impact of artificial intelligence grows.
