Late last month, I published “A Brief History Of 2023’s Macro Narrative Stop-Outs” which, as the title implies, recapped the ebb and flow of an ever-shifting market zeitgeist.

The point was both to remind readers of “how we got here,” so to speak, and also to illustrate how nimble one has to be to stay in step with fickle markets these days.

In fairness to anyone wrong-footed by the equity rally (or by bonds’ inability to break out of what now threatens to be an unprecedented three-year streak of annual declines for US Treasurys), it would’ve been difficult to trade the market correctly in 2023 even with a crystal ball. And even if you were bullish on A.I., there was no guarantee ChatGPT would go viral, setting in motion a chain of events that culminated in the overnight gold rush which propelled Nvidia into the stratosphere and drove the Nasdaq 100 to its best first half on record.

I’ve been critical recently of stubborn bear narratives, not because they aren’t eminently plausible, but rather because we’re coming up on the one-year anniversary of the October 2022 lows for US equities. Implicit (it used to be explicit) in some bear cases is the notion that the S&P might yet revisit those lows. Officially, most bears have abandoned that notion (i.e., it’s not reflected in their price targets), but it’s still there in spirit if you read between the lines. Frankly, I don’t think it’s going to happen, and even if it does, we’re arguably past the sell-by date on such calls.

I captured the problem succinctly when I wrote, on August 25, that the bears versus bulls battle since October 2022 is lost. “That doesn’t mean you have to turn bullish, but you do have to turn the page,” I insisted.

Another way of putting it is to say that a market “call” with no expiration date isn’t really a market call, just like saying “One day, it’ll rain again” isn’t a weather forecast.

And yet, I’ll confess some sympathy for the notion that if a “target” for an equity benchmark is simply marked to market multiple times throughout the year, then it’s not really a “target.” The old adage about “When the facts change” sounds good, and there’s a lot of truth to it, but if your job is to forecast the level of a stock index 12 months in advance, and you change your forecast say, four times over that 12-month period, it’s not obvious what value you’re adding. In that context, maybe the bears are a more noble bunch than the strategists who’ve marked up their targets this year.

The trick is to strike a balance between, on one hand, conviction in one’s methods and the forecasts those methods produce and, on the other, being willing to concede the argument when circumstances conspire to render that forecast invalid or otherwise undercut the plausibility of claims to prescience.

With all of that in mind (and coming back to the “how we got here” discussion), two of the sell-side’s most well-known strategists this week offered their own recaps of 2023’s twists and turns in the context of their persistently bearish views on US equities in the face of a rally which, until last month anyway, was unrelenting and very nearly saw the S&P make a run at new records.

Below, find recaps from JPMorgan’s Marko Kolanovic and Morgan Stanley’s Mike Wilson, both of whom reiterated a cautious view on the macro and markets. For those who might’ve missed it, Kolanovic also offered an assessment of the geopolitical landscape which was particularly foreboding.

Via Marko Kolanovic

Most of the year, we have held a negative outlook for risk markets (our year-end price target for the S&P 500 is 4200), and over the course of the year we have increased our model portfolio’s allocation to cash. The market is currently about ~5% above our price target, which is roughly equal to current cash yields. There were two main reasons why we took a negative stance: 1) the unprecedented rise in interest rates (relative to the current levels of debt outstanding), which are slowly eroding economies and setting the stage for a market de-risking, and 2) geopolitical deterioration that has significantly increased tail risks for economies and global markets. Following the regional banking crisis earlier this year, markets took an optimistic view: Soft landing became a consensus, European stocks rallied at the back of China reopening (e.g. luxury goods, travel, etc.), and Japan stocks rallied as many institutions reduced exposure to China and moved money into Japan as a proxy. The US equity market rallied as investors extrapolated that A.I. will transform and boost the economy and corporate profitability in a short period of time; however, we see this as unrealistic. US tech stocks, particularly the largest ones, drove the market higher, as the NDX rallied ~50%. This rally was mostly a multiple expansion on the A.I. narrative, while in some cases revenue of key tech stocks declined, and overall corporate profits declined YoY (as of June 30th). Furthermore, any theoretical market model (risk premia) would have expected multiples to decline given the increase in interest rates. Perhaps more significant than these narratives, systematic inflows into stocks were driven by a decline in market volatility, as both fundamental and quantitative investors re-levered from relatively low positioning at the end of last year. As both premises for our cautious outlook (rates and geopolitics) turned more negative over the past few months, while positioning and valuations increased, we think there is now a higher likelihood of a crisis over the next six to 12 months, the severity of which could be higher than market participants anticipate.

Via Mike Wilson

The markets were pricing a much higher than normal likelihood of recession earlier this year which then further reinforced the consensus view that a recession was coming. Fast forward to June and that vicious circle between price and narrative had reversed into a virtuous one where soft landing became the more widely assumed outcome. Of course, excitement around artificial intelligence also played a role which morphed from a very narrow list of beneficiaries (NVDA, AMD, MSFT, GOOGL, META, etc) to the economy/ market broadly. This then gave way to a rally in small-caps and other economically sensitive parts of the market in June and early-July. However, those rallies were stymied right at their early February highs and then rolled over sharply with both small-caps and cyclicals underperforming. These failed rallies may now produce some doubt in the minds of market participants looking for a broadening out of the stock rally, and consequently, a soft landing or the growth re-acceleration that is now priced into many areas of the market. Many have argued the economy has been strong this year and is not in a weakened state at all. However, if we take away the incredibly strong government sector, that conclusion might be different. In fact, personal consumption expenditure growth slowed considerably in Q2 and appears to be getting weaker based on recent commentary from numerous retailers and the recent rise in delinquencies. As a result, we can’t help but remain skeptical that economic growth is accelerating.