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Why bank analysts’ bullishness about U.S. stocks is a problem

Investment bank still prefers European stocks over U.S. stocks

One of the biggest problems with the stock market — coming up on its sixth bull year — is that no one actually believes it could finish lower this year.

That is the view of analysts at J.P. Morgan Cazenove who are clearly troubled by the huge degree of optimism still left in this market right now, even as stocks have gotten 2015 off to a rocky start.

“Bullishness on the direction of U.S. equities is fully consensus – not a single sell-side house is calling for S&P 500 to be down this year, and that is coming after S&P 500 tripled from the ‘09 lows and U.S. stocks appear to be fully owned in global portfolios,” wrote a J.P. Morgan research team led by Mislav Matejka, global equity strategist at the investment bank.

The so-called sell side refers to investment banks, corporate and commercial banks, who tend to sell investment products and services, while a segment known as the buy side generally consists of asset managers, hedge funds, institutional investors and average investors, who purchase investments. The sell-side consensus, said J.P. Morgan, citing Bloomberg numbers, calls for a median S&P 500 SPX, -0.20% target of 2,225, with 2,100 on the lower and 2,375 on the upper end of projections.

After a 3.5% fall for stocks in January, the S&P 500 was trading at 1,986.77 on Monday, shaping up to be another down day for markets.

J.P. Morgan nailed its S&P forecast in 2014, and as of December, was calling for an end-of-2015 target of 2,250.

Also in a note out Monday, analysts at Citi said the buy side is calling for a 2,177 year-end S&P 500 target. They added that investors already think bottom-up 2015 sell-side estimates are too high and most now think a 20% correction is more likely than a 20% rally.

J.P. Morgan prefers eurozone and even emerging market stocks over the U.S. market. Back in November, the bank suggested an overweight on Europe and an underweight on the U.S. due to the poor performance of European stocks. While eurozone stocks have strongly outperformed year-to-date, it is still not a crowded trade, said Matejka. He noted that exchange-traded-fund data shows that investors are still heavily overweight the U.S. versus Europe.

His other reason for caution on U.S. stocks?

  • Federal Reserve liquidity is ending
  • Profit margins are at record highs, with a sign that the cost base is moving up, notably for wages
  • A strong U.S. dollar will be a continued headwind for corporates, and it isn’t a one-off
  • Lower oil prices will help the top line eventually, but for now it is driving negative revisions to earnings per share.
  • U.S. high-yield credit has rolled over, opening up a gap with U.S. equities

On this last point, Matejka said equities are probably not going to keep benefiting from investor cash that is been pouring into equities to escape the lack of yield from bonds, as those yields are starting to signal poor growth and weak corporate pricing power. And if those yields move much lower from here, then equities could also fall, he said.

Barbara Kollmeyer