U.S. inflation reached a 40-year high in May, and the U.S. Bureau of Labor Statistics released data last week that revealed that the annual rate of inflation reached 8.6 percent last month, saying it was “the largest 12-month increase since the period ending December 1981.”
While inflation continues to rise, forcing interest rates through the roof, consumer sentiment plunged earlier this month to the lowest it has been since 1978, according to a report from Bloomberg. Because of this, investors have had to reconsider what they’d be willing to pay for stocks in recent months.
Still, Morgan Stanley strategists, led by Michael Wilson, are optimists, as Wilson wrote in a note, “The Equity Risk Premium does not reflect the risks to growth, which are increasing due to margin pressure and weaker demand as the consumer decides to hunker down.”
Goldman Sachs strategists led by David J. Kostin said that U.S. earnings estimates are still too high and expect them to continue on a downward trend.
Kostin wrote in a note according to Bloomberg that despite this year’s selloff in the stock market index, S&P 500, “equity valuations remain far from depressed.” The inflation data, Kostin said, show “that the Fed’s battle with inflation has put a ceiling on equity valuations.”
All signals point to the S&P 500 nearing a bear market, and there are fears that it will most likely push the Federal Reserve to extend a series of interest-rate hikes going into the fall, and the Associated Press reported that the risk now is that the Fed could cause a recession if the rates are raised too high or too quickly.
Morgan Stanley’s Wilson said that the 3,400 points, roughly 13 percent lower from Friday’s stock market close, is a “more reliable level of support” for the S&P 500 to avoid a recession by late August, according to Bloomberg.
And the Associated Press advised that unless one needs their money right now, dumping stocks is not a good idea. Advisors suggest putting money into stocks if it won’t be needed for a few years, adding that the S&P 500 has come back from all its prior bear markets.
Still, other advisors, namely JPMorgan Chase CEO Jamie Dimon, one of President Joe Biden’s detractors, warned that caution is key. “Right now it’s kind of sunny, things are doing fine. Everyone thinks the Fed can handle this,” Dimon said at a Bernstein conference this week. “That hurricane is right out there down the road coming our way.”
Newsweek reached out to Goldman Sachs for additional comment.
