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Stock-market experts foresee the market cruising to a gain over the coming year, despite a year of rising rates, according to Bankrate’s Third-Quarter Market Mavens Survey. They expect the market to rise about 6.5 percent in the coming twelve months, amid growing economic uncertainty.
The survey’s respondents predict the S&P 500 index will climb to an average of 4,578, up from 4,299.70 when the survey closed on Sept. 28. This quarter marks the 12th straight time that pros predicted a rising market in the year ahead. These market mavens continue to prefer U.S. stocks to global equities, but this time out they prefer value stocks to growth stocks.
“Just when it looked like the economy should avoid a hard landing, uncertainties and surging yields have emerged, recently generating a rockier road for investors,” says Mark Hamrick, Bankrate’s senior economic analyst. “The rise in stocks from last October’s lows as well as the recent declines in the key averages argue for diversification and focus on the long term.”
“As economists tell us, the possibility of a recession over the next year has not been eliminated. If a contraction were to materialize, that would be yet another challenge to navigate,” he says.
But investors focused on longer time periods should not be sweating near-term volatility.
“Most of our market mavens indicate that returns from equities broadly should be nominal over the intermediate term, and they suggest focusing on value and U.S.-based companies,” says Hamrick.
Forecasts and analysis:
This article is one in a series discussing the results of Bankrate’s Third-Quarter 2023 Market Mavens survey:
- Survey: Despite economic uncertainty, experts foresee stocks climbing 6% in year ahead
- Survey: Market pros see 10-year Treasury yield declining over the coming year
- Survey: Will shifting Fed policy and the 2024 election help or hurt stocks? Here’s what top market analysts are saying
Stocks poised to ramp up in the coming year
After a strong first half, the stock market spent the third quarter mostly in the doldrums. The Federal Reserve has quit threatening to stomp even harder on the economic brake of higher interest rates, forecasting just one more rate hike in the near term. However, central bankers have been telling investors to expect rates to stay “higher for longer.” So while they may not be hitting the brake much harder from here, they’re going to be holding it where it is for a while yet.
Amid this backdrop, the survey’s respondents expect the S&P 500 index to rise roughly 6.5 percent over the coming year, below the market’s long-run annual average of 10 percent. That percentage gain corresponds to 4,578 in the S&P 500 index. Just two of the analysts expect the market to not rise in the coming four quarters, with the rest offering no prediction or foreseeing a climb.
Many investors remain divided as to whether the economy will dip into a recession or manage to avoid one and enjoy a more modest “soft landing.” Many analysts in the Bankrate survey pointed to rising bond rates as a notable headwind for stocks as well as the real economy.
“Rising rates will hurt stocks,” says Marilyn Cohen, CEO, Envision Capital. “When the cost of capital rises, that can put stress on earnings for companies who must borrow. Plus, banks will continue to lend as carefully and little as possible. In other words, at some point, bond yields will stifle economic growth.”
“The rise of interest rates is finally starting to move through the economy as measured by slower real estate transactions, lowering of consumer confidence, etc,” says Clark A. Kendall, CFA, AEP, CFP, president and CEO, Kendall Capital. “But the equity market has already discounted slower economic activity.”
Stocks should perform in line with five-year averages
The Bankrate survey showed that experts became a bit more optimistic about five-year returns in the stock market, relative to the second-quarter survey. A sizable percentage of respondents moved from expecting normal returns to above-average returns:
- 27 percent said returns will be lower than long-term returns.
- 53 percent of respondents said returns will be about the same as their historical average over the next five years.
- 20 percent said returns will be above the historical average.
As you can see in the graphic below, the main shift occurred from respondents expecting average returns to expecting above-normal returns, though the overall split still suggested normal returns for the next half-decade.
“One big question is whether the era of super low interest rates is over, and whether yields will be topping out,” says Hamrick. “There are huge implications at both the macro and micro levels, including businesses, central banks, governments and individuals.”
One of those expecting lower forward returns is Michael K. Farr, CEO, Farr, Miller & Washington, pointing to current valuations and debt burdens.
“Valuations are currently high, especially if we adjust for interest rates,” says Farr. “We do expect rates to normalize lower over the next year, but heavy debt burdens across a number of sectors will hold back economic growth, corporate earnings, and therefore stock appreciation.”
In contrast, Dec Mullarkey, managing director, SLC Management, expects above-average returns due to innovation. “U.S. breakthroughs in technology should continue to spur productivity,” he says. “Also, spending related to the Inflation Reduction Act should attract more capital and help the U.S. become a leader in green and sustainable solutions.”
Other respondents pointed to reasonable valuations and simple reversion to the mean as reasons to believe the market will have average returns for the next five years.
“Valuations are currently fair, and that would suggest historic-average type returns,” says Sameer Samana, senior global market strategist, Wells Fargo Investment Institute.
“Returns from equities over the next five years will likely be about the same as their historical average,” says Sonu Varghese, Ph.D., global macro strategist, Carson Group. “Over longer periods of time, stock market returns tend to converge to their historical average, even though there can be a lot of variation over short time periods.”
U.S. stocks still the place to be, say pros
The survey’s respondents preferred American stocks for the coming year over their international rivals once again this quarter, and U.S. stocks were a much greater favorite than the prior quarter:
- 60 percent of respondents favor U.S. stocks in the coming year.
- 27 percent prefer international stocks.
- 13 percent said the returns between the two would be about the same.
In the prior survey, just 42 percent of respondents preferred U.S. stocks, while 33 percent tapped international stocks to outperform and 25 percent said returns would be even.
Many market watchers cited macroeconomic concerns in their preference for U.S. stocks.
“The U.S. is ahead of the curve in fighting inflation and is in a better position than most countries – so our companies are set to perform better,” says Kim Forrest, chief investment officer and founder, Bokeh Capital Partners.
“We believe U.S. economic growth will be stronger than the rest of the world, relatively,” says Varghese. “So, this should boost U.S. equities. Relatively stronger growth in the U.S. is also likely to keep the dollar strong, and a stronger dollar typically tends to be a headwind for international stocks.”
Others pointed to macro issues as well as American economic dynamism.
“We continue to favor the U.S. over a 12-month horizon, which should incorporate predilections for an eventual rate cut (or more) from the Fed and ongoing excitement over AI growth opportunities driven by innovative, U.S.-based companies in the face of a slower global growth environment,” says Patrick J. O’Hare, chief market analyst, Briefing.com.
But other analysts favored global companies on macroeconomics, too.
Robert A. Brusca, chief economist, Fact and Opinion Economics expects “more severe weakness in the U.S. and Fed easing will drop the dollar and enhance returns in foreign currencies.”
Value stocks now preferred over growth
Value stocks are often the choice of the pros when the overall economy looks tougher, and the pros expect them to outperform growth stocks over the coming year, according to the Bankrate survey. Here’s how the results stacked up:
- 60 percent of respondents prefer value stocks to growth stocks over the next year.
- 33 percent favor growth stocks to outperform value.
- 7 percent think returns will be about the same.
In the first-quarter and second-quarter surveys, growth stocks were the substantial favorite of the pros, but value stocks returned with a decisive “victory” in this quarter’s poll.
“With inflation dropping and expectations of a hard landing receding, growth assets should continue to perform well next year, but value stocks should outperform,” says Mullarkey. “In particular, mid- and small-cap stocks are currently trading at lower valuations versus large-cap stocks and versus their own history. With growth stabilizing, earnings should pick up, providing opportunities for greater multiple expansion within value stocks and particularly small-caps.”
“Value is too cheap relative to growth,” says Charles Lieberman, managing partner and chief investment officer, Advisors Capital Management. “And rates will be higher, which is more of a headwind to growth than to value.”
But Hugh Johnson, chief economist, Hugh Johnson Economics, points to a rebound in equities for his optimism that growth is better here: “Historically growth outperforms value in early stages of a renewed bull market.”
And Forrest is upbeat on growth stocks, too, noting: “Value only works when it is growing – the bias is always toward growing companies.”
Bankrate’s third-quarter 2023 survey of stock market professionals was conducted from Sept. 21-28 via an online poll. Survey requests were emailed to potential respondents nationwide, and responses were submitted voluntarily via a website. Responding were: Sameer Samana, senior global market strategist, Wells Fargo Investment Institute; Hugh Johnson, chief economist, Hugh Johnson Economics; Sonu Varghese, Ph.D., global macro strategist, Carson Group; Dec Mullarkey, managing director, SLC Management; Charles Lieberman, managing partner and chief investment officer, Advisors Capital Management; Marilyn Cohen, CEO, Envision Capital; Clark A. Kendall, CFA, AEP, CFP, president and CEO, Kendall Capital; Robert A. Brusca, chief economist, Fact and Opinion Economics; Patrick J. O’Hare, chief market analyst, Briefing.com; Kenneth Chavis IV, CFP, senior wealth counselor, Versant Capital Management; Kim Forrest, chief investment officer/founder, Bokeh Capital Partners; Brad McMillan, chief investment officer, Commonwealth Financial Network; Michael K. Farr, CEO, Farr, Miller & Washington; Sam Stovall, chief investment strategist, CFRA Research; Chuck Carlson, CFA, CEO, Horizon Investment Services.
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