Barclays believes that tapering of the Fed’s bond-purchase program will not lead to a significant sell-off in the stock market.
“Even more dramatic shifts in monetary policy have historically not caused a significant market reaction,” Maneesh Deshpande of Barclays said in a note Tuesday.
The firm raised its Dow Jones price target for the year to 4,600, implying a 1.4 percent increase from the index’s close on Friday.
According to Barclays, the Fed’s 2013 taper of quantitative easing, 2017 balance sheet reduction, and unexpected federal funds rate hikes suggest that central bank action around tapering should have little impact on the stock market.
Strong earnings should continue to drive the Dow Jones higher, according to the firm. According to FactSet, 87 percent of Dow Jones companies reported higher-than-expected earnings per share in the second quarter. This is the highest level since 2008.
“We believe the recent EPS surprise strength will continue in 3Q21/4Q2,” Deshpande said.
However, high valuations and a faster-than-expected rate of tapering could lead to a more significant sell-off, according to Barclays.
According to Barclays, stocks linked to the pandemic should benefit from the current Covid environment. According to the bank, growth stocks that are not tied to the economic cycle, as well as quality stocks with positive Covid exposure, should outperform the market.
Morgan Stanley downgrades the Dow Jones
“We anticipate a bumpy September-October as the final stages of a mid-cycle transition unfold,” Morgan Stanley chief cross-asset strategist Andrew Sheets wrote in a note. “The next two months pose a disproportionate risk to growth, policy, and the legislative agenda. We reduce U.S. equities to UW and prefer European and Japanese stocks.”
This year, the S&P 500 has gained about 20% without a single 5% pullback. Since its pandemic low in March 2020, the broad equity benchmark has more than doubled, marking the fastest bull market doubling off a bottom since World War II. The S&P 500′s strong run has occurred even as the Covid-19 delta variant has raised concerns about the economic recovery′s path.
Morgan Stanley’s bearish outlook is based on the Fed’s potential tapering of monetary stimulus in the face of rising inflation. The policy risk coincides with the stock market’s poor seasonality in September, according to the bank.
“Cyclical assets have struggled since March as economic rate-of-change peaked and delta cases surged,” Sheets said. “At the same time, inflation (and inflation expectations) have remained elevated, adding to the tension created by low yields and exceptionally easy monetary policy.”
Fed Chairman Jerome Powell has indicated that the central bank will begin withdrawing some of its easy-money policies before the end of the year, though he still sees interest rate hikes in the future.
“These forces are now converging on a period with historically poor seasonality, a heavy supply calendar, and an unusually heavy event calendar,” he continued.The bank maintained its year-end target for the S&P 500 at 4,000, a roughly 12% decrease from Friday’s close of 4,535.43. According to the Market Strategist Survey, it is among the most bearish views on Wall Street, with the average year-end target from the top strategists standing at 4,328.