'The worst may not be over': Why one Wall Street analyst is wary of the market's rally

• Societe Generale analysts are wary of the market's rebound rally from March 23 lows.
• "The wobbling performance of cyclicals so far and the continuation of Momentum indicates the fragility of the underlying pending economic recovery," Solomon Tadesse wrote in a note on Thursday.
• That could suggest that the worst may not be over in the markets, the note said.
• Still, as the economic data stabilizes and a recovery takes hold, cyclical stocks should gain steam, Societe Generale wrote.
• Read more on Business Insider.

One Wall Street analyst at Societe Generale is wary of the market's "spectacular" rally from March lows.

"The wobbling performance of cyclicals so far and the continuation of Momentum indicates the fragility of the underlying pending economic recovery, at least in the near term, suggesting that the worst may not be over for the market," Solomon Tadesse wrote in a note on Thursday.

Tadesse, the head of North American equity quant research, also reiterated his views in an interview with Bloomberg.

Global markets were roiled in March by the coronavirus pandemic, plunging into bear territory and ending the longest bull market on record. Since then, stocks have staged a major comeback — the Nasdaq erased its losses for the year in May, and the S&P 500 index and the Dow Jones industrial average are barreling back toward their February highs.

The rally has taken place amid increasingly dismal economic data, which may be weighing on cyclical stocks, the note said. In addition, Societe Generale said the market rally had been disproportionately led by a small group of tech stocks including Facebook, Amazon, Netflix, Google, Microsoft, Apple, and Nvidia.

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The outperformance of these stocks is lifting the entire market, potentially distracting from the chance of another downturn, the note said.

Still, cyclical stocks should gain steam as the economic recovery takes hold — all 50 US states have relaxed at least some coronavirus-related restrictions.

"As eventual recovery takes hold, cyclicals should come back to a sustained rally, reflecting both the prospect of economic growth and their historically depressed valuations," Tadesse wrote.

Societe Generale's call came just before Goldman Sachs on Friday walked back its negative outlook for the S&P 500, moving its downside forecast to 2,750 from 2,400.

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