- US stocks still have further room to run, according to a Wednesday note from GlobalData TS Lombard.
- The firm upgraded its outlook for US stocks and said any economic recession would be mild.
- These are the eight charts that suggest the bull market in US stocks could continue.
The bull market in stocks that started earlier this year isn't ending anytime soon, according to a Wednesday note from GlobalData TS Lombard.
The investment research firm upgraded its outlook for US stocks as the economy shows few signs of an imminent recession, adding that "equities probably have further to run."
"The growing probability of a US reacceleration, coupled with continuing disinflationary trends, suggests the equity bull run will probably continue," TS Lombard's Andrea Cicione and Skylar Koning said. The pair said that if a recession does materialize between now and the start of 2024, it will likely be mild with limited downside for stock prices.
TS Lombard highlighted eight charts to back up its bullish view on the US stock market.
1. Inflation is falling. That's good for stocks.
"Disinflation remains the key macro story. Data surprises are strongly positive in the US. The Fed is approaching the top of its hiking cycle, although markets discounting early cuts may be too optimistic," TS Lombard said.
2. Negative inflation surprises
"Continued disinflation and the approaching end of the global monetary tightening cycle should provide a positive impulse for the US economy. While spending power has lagged price increases over the past couple of years, this is now changing. Indeed, it could lead to a reacceleration before a recession takes hold," TS Lombard said.
3. Credit conditions are improving
"Despite QT and the rebuilding of the Treasury General Account (TGA), US financial conditions have continued to ease. Credit spreads – the most reliable indicator of credit conditions – remain relatively tight and well behaved. The TGA is now above pre-pandemic levels," TS Lombard said.
4. Yields are rising because the economy is solid
"The speed of the rise in yields matters. When it is relatively gradual (as it has been in recent months), collateral adjustments can take place without major disruptions. The reason for the rise matters, too. In 2022 it was mainly the result of sudden changes in monetary policy expectations... This time round, the yield rise appears to be the result, at least in part, of an improving macro outlook."
5. Corporate margins are resilient
"Just like the economy, US corporate fundamentals may be bottoming. Since 2021, margins have been rising and falling in line with inflation. In fact, corporate margin expansion was one of the main causes of inflation in 2021-22. Following five quarters of steady decline, margins appear to have stabilized in Q2 2023."
6. Earnings recessions are usually short-lived
"Earnings have stalled in the past year or so amid contracting margins but sales have been growing at a healthy clip. With inflation and margins normalizing, what follows next is likely to be a function of the economy: if a recession is avoided and US growth reaccelerates, EPS will probably do so, too; but if the economy contracts meaningfully, so will earnings. Under our central case of a mild recession, earnings should continue to flat-line until year-end and then start recovering," TS Lombard said.
7. Investors are under allocated to US stocks
"Investors remain underinvested in US equities. As a recession remains elusive, allocation to those assets will likely continue to increase."
8. Investors are not bullish
"Short-term sentiment became quite exuberant in July and the market looked overbought. Sentiment has largely normalized now; and the S&P 500, if anything, appears oversold today," TS Lombard said.