Somebody Has To Be Wrong

“We’re at 3,800 on the S&P 500 for year-end,” BofA’s Jill Carey Hall told Bloomberg TV on Friday. “A lot of the good news has been priced in.”

Carey Hall’s remarks came a day after Goldman’s David Kostin lifted the bank’s forecast for the benchmark to 4,700. JPMorgan lifted their target to 4,600 two weeks ago.

Somebody has to be wrong. But then again, when it comes to year-end S&P targets, “somebody” is almost always “everybody.” It’s typically just a matter of who’s more wrong.

As I’m fond of putting it, forecasting during the pandemic was a lot like forecasting in any other year: Just a drunken game of blindfolded darts. The difference in the COVID era is that everyone’s drinking Everclear instead of Sam Adams. Throw in an unprecedented policy conjuncture and the notion that large subsets of investors (some of whom are new to stocks) seem to understand that none of this is actually real, and you’re left to ponder the distinct possibility that “your guess is as good as anyone’s” can now be taken even more literally than usual when it comes to projecting where a given benchmark will be six months from now.

To be sure, nobody is going to be surprised if some of the more “bearish” (another term that’s now so relative as to be almost meaningless) forecasts end up being closer to the mark. Valuations have virtually never been more stretched (figure below).

If you’re looking for bubble talk, there are plenty of “legends” willing to indulge you. Howard Marks — whose memos I stopped reading altogether last year, when they devolved into what I described as clumsy attempts at philosophical profundity — said Thursday that thanks to the Fed, “we’re in an everything bubble.”

Forgive me, but how many members of the pantheon are going to use that phrase? “Everything bubble” I mean. Have they run totally out of superlatives now? I guess once you’ve rolled out “Real McCoy,” “humdinger” and “absolute, raging mania,” you’re already at an “11.”

By the way, do you know how much upside you’d have missed if you followed the advice implicit in those (linked) rants from Jeremy Grantham and Stan Druckenmiller? The figure (below) shows how bad it was at the end of April. It’s gotten worse since then. The chart starts from the day Druckenmiller said equities represented the “worst risk-reward” he’d seen in his entire career.

As a quick aside, I thought about updating that with a few more recent soundbites from “legends” delivered over the past three months, but it felt gratuitous. Some readers get irritable when I disparage so-called “Hall of Famers.” That’s the true test of hero worship: When adults get angry on behalf of other adults for perceived slights.

By now, we all know the bear case. And 2020 reminded us that the world can actually come to an end. But on the bull side, Goldman reminded folks this week that buyback announcements have totaled more than $680 billion YTD. That ranks behind only the $736 billion witnessed over the first seven months of 2018, following the Trump tax cuts. Executions in the second quarter of 2021 were up 93% over Q2 2020 and nearly 30% above Q2 2019, Goldman went on to say (figure on the left below).

I personally doubt the “excess savings” narrative when it comes to supporting the economy because, frankly, I don’t have the same definition of “excess” as most people. But what I don’t doubt is the capacity of cash parked idle in money market funds to be deployed into stocks. If you have a money market fund with any sizable amount of cash in it, it’s probably deployable, so to speak. Money market fund assets are still loitering around $5.4 trillion, up more than $1 trillion since the onset of the pandemic.

Goldman’s Kostin noted that the total is “more than $2 trillion higher than balances in 2015, prior to the Fed’s last hiking cycle.” He went on to say that “with real rates at record lows and the Fed likely to remain on hold until late 2023” the bank “expect[s] much of this excess cash will fund additional household purchases of equities.”

Earlier this month, BofA’s Savita Subramanian flagged a gauge of Wall Street’s average recommended equity allocation (figure on the left below), cautioning that strategists haven’t been this bullish since May of 2007.

That mirrors remarks from Morgan Stanley’s Mike Wilson, who last month observed that the percentage of sell-side ratings that are Overweight or Buys for the top 1,000 stocks by market cap is 59%, which he noted is “the highest since the passage of SOX and a clear outlier over the last 18 years.”

And yet, as the figure on the right (above) suggests, BofA’s private clients seem to agree with the idea that equities are the place to be. At 64.8%, equity holdings as a percentage of AUM have never been higher.