Equities in the US are ripe for stockpickers, say strategists. The market as a whole is likely to remain flat to firmer in the next few months, but those with an eye for a bargain could be the winners in the current climate, they say.
“For now, it’s time to sit on the fence with regard to sector betting,” says Chris Johns, strategist at ABN AMRO. “Stock picks are more important than sector bets.”
For instance, while it is hard to be enthusiastic about the technology sector as a whole, there are certain individual stocks worth buying, he says.
Most strategists expect to see slow growth in the market this year. “US equities should be up a bit over the next six months… but progress will be two steps forward and one back. It will not be a straight line,” Johns predicts.
The market is particularly sensitive at the moment to any news about consumer behaviour. In mid-March, the equities fell sharply on news of a smaller-than-expected rise in retail sales. Traders said at the time that the market had simply got ahead of itself because of a spate of good news.
By the end of the year, however, the broad market indicator, the S&P 500, should be showing growth of between 5 and 10%, says Johns.
“All of the good news is more or less priced in,” said Peter Dixon, equity economist at Commerzbank in London. For a long time now, he says, the market has expected an economic rebound to happen in the second half. “I think that is happening now,” he says.
So the market now harbours high expectations of profit growth. US corporate profits are generally forecast to rise between 12 and 15% this year, which is steep, says Dixon, given current conditions.
“It’s certainly achievable though, dependent on a recovery which we are now getting,” he says. However, there is little upside for share prices, he says.
Johns agrees the most crucial factor for the US market right now is profit growth. “We haven’t had any for two years,” he notes.
Rupert della Porta, head of North American equities at Aberdeen Asset Management in London said he expects the economy and corporate earnings to improve, and this will drive the market. “We’re much more confident that an earnings recovery is underway… and the market is reasonably valued on the basis of depressed earnings and versus bonds.”
“We think we’ll get double digit earnings growth in the second half, though earnings in the first half will be a damp squib,” he says. Recovery in the manufacturing sector will take place, he forecasts, and this will in turn lead to a rebound in corporate profits.
There are downside risks, though. Dixon warns that if signs were to emerge of a double dip recession or outbreak of further hostilities against the US, that might impact earnings which in turn would lead to downside for shares.
Interest rates are seen creeping up this year. Though this increase is likely to be narrow, it will serve to dampen upside for the market. Johns predicts the Fed Funds rate will be subjected to two 25 basis point hikes before the end of the year, from its historically low level now of 1.75%.
Della Porta sees only a small rise in the Fed funds rate by the end of the year. “There is no sign of inflation, therefore we are not expecting a meaningful pick up in interest rates,” he says.
Opinion on US stocks is still split between the technology and non-technology sectors of the market. Prices are likely to hold up in the ‘old economy’ parts of the market, but on the technology side – largely represented by NASDAQ – there will be little upside, says Dixon.
The sector remains overbought from the late 1990s and early 2000, and this will take some time yet to work through. “Right now the cyclical sector should be profiting,” says Dixon.
Consumer-orientated stocks could benefit, including media advertising where companies could see an improvement in revenues as consumer spending picks up, he believes.
But Della Porta sees no room for dramatic improvement in consumer spending. The recovery in US share prices overall is likely to be muted partly because of consumer behaviour. The most important part of the US economy is the consumer, he says, and in this economic cycle there has been no real consumer recession.
“Without consumer (demand) being in recession, we’re not going to see a consumer rebound. Normally this gives you a very strong move in the economy – coming out of recession,” he says.
Inventory building should bolster profits too, says Della Porta. America has sold everything on the shelves, he says, and a heavy degree of restocking needs to happen.
Even if nothing dramatic is likely to happen on the consumer front, restructuring efforts – including job losses and efforts to stabilise cashflows – within corporations will go on for a while and continue to support earnings figures.

Topics