NEW YORK • Some of Wall Street’s biggest players view the market’s recent tech-led sell-off as a bout of turbulence rather than the start of a longer slide – and they do not see it as a reason to run for the door.
Invesco this week called the sharp fall in the Nasdaq a “healthy period of consolidation”, while fund manager Lord Abbett said US stock valuations are likely merited, based on an analysis of firms’ earnings.
Last Friday, Goldman Sachs reiterated its year-end price target of 3,600 on the S&P 500, about 6 per cent above its close this Wednesday. UBS Global Wealth Management recommended clients “ease into the markets” rather than stay on the sidelines.
Their optimism highlights how the Federal Reserve’s pledge to keep interest rates at record lows and hopes of a breakthrough in a vaccine for Covid-19 have underpinned market gains this year.
But many remain wary that the US presidential election and huge options bets on tech-related stocks could exacerbate market swings for the rest of the year.
“What we think we are going through is a healthy correction, removing the froth,” said Mr Troy Gayeski, co-chief investment officer of SkyBridge Capital, an investment firm. “We certainly could fall more. But if you’re a tech investor, you had to understand that the valuations were very high.”
The Nasdaq posted its best day since April on Wednesday, a day after falling into correction territory, defined as a fall of 10 per cent or more from a recent peak. The other major indexes also rebounded on Wednesday after steep declines.
“I think of this rout not so much as a correction, but as a digestion,” Invesco’s chief global market strategist Kristina Hooper said in a note.
Second-quarter reported earnings on the S&P 500 were 23.1 per cent above expectations, far above the trailing five-year average of 4.7 per cent, analysts at Lord Abbett said in a recent note.
“Earnings momentum, and the magnitude of analyst earnings revisions, is outpacing that in other markets, suggesting that higher valuations on US equities are merited,” the report said.
Still, some expect more volatility ahead. A recent poll of UBS Global Wealth Management investors showed 65 per cent viewed politics as their top concern, with the Nov 3 US election just weeks away.
Prominent investor Stanley Druckenmiller – a sceptic of this year’s rally – again sounded a bearish note on Wednesday, warning on CNBC that the market is in a mania fuelled by the US central bank.
Uncertainty over huge options purchases by SoftBank Group also hung over markets, creating another risk.
SkyBridge’s Mr Gayeski said he could see an opportunity to increase equity risk if there was a sharper drop, such as the Nasdaq falling 20 per cent or the S&P 500 declining 15 per cent from their respective highs and there were other supportive signs for the market such as the Fed’s expanding its balance sheet further.
Any selling that spreads beyond the big tech-related stocks that have led markets higher could be an indication that the pullback may be extending further, said Mr Willie Delwiche, an investment strategist at Baird. In the coming days, he will be looking for signs of increasing investor caution – such as buying of put options, outflows from equity funds and diminishing bullish views in surveys – that indicate any overexuberance has waned.
Another indicator is how investors respond to key technical support levels, said Mr Keith Lerner, chief market strategist for Truist/SunTrust Advisory.
The Nasdaq, for example, on Tuesday closed below its 50-day moving average for the first time since April, but was back above it on Wednesday.
“If you see these markets just slice through support levels, that’s a sign that the sellers have the upper hand,” Mr Lerner said.