Credit Suisse tells clients to sell into a 5% stock rally it sees coming

Global stocks are likely to rise in the near term and investors should be selling into that strength, according to Credit Suisse strategists.

Reduced corporate profit expectations, tightening financial conditions due to Federal Reserve actions and elevated levels of corporate debt are three of the principal factors conspiring to limit market upside, the bank said in a research note. Weakness in China and an overall inability for central banks to respond also are compounding the challenge.

To be sure, Credit Suisse does not see conditions ripe for a bear market and is in fact forecasting a further boost in equities on top of the solid rally that has kicked off 2019.

But it anticipates that the market obstacles will make further increases tough to come by.

“We stick to the year-end targets … which currently point to around 5% upside for the key global markets, but advise selling developed markets into the rally rather than continuing to build positions,” analyst Andrew Garthwaite and others said in the report.

On the positive side, Garthwaite said a recession is unlikely, valuations are attractive particularly outside the U.S., and central bank pauses in rate hikes, like the one the market expects from the Fed, typically coincide with market gains.

The slowdown in corporate earnings, after a year in which U.S. companies posted 20 percent gains, is one obstacle. This year is likely to see that earnings pace domestically drop to 6.9 percent, according to FactSet.

“Global earnings revisions are now negative and correlate very closely to moves in equities,” Garthwaite wrote. “At this level, they are now consistent with falling equities over the next year.”

The note also cited a slowdown in money supply that is consistent with declines. Specifically, the Federal Reserve’s four rate hikes in 2018, combined with the reduction of the bond portfolio on its balance sheet, have caused the money supply to slow.

“We would also stress that the contraction in the Fed balance sheet is unprecedented and, although correlation is not causation, that such a contraction has historically been problematic,” Garthwaite said.

The firm also sees some problems with China, though it is not advising clients to ditch investments in the country.

Chinese growth is on pace to post its slowest level since 2009, and the country finds itself locked in a bitter trade dispute with the U.S. that has featured tit-for-tat tariffs that has slowed the movement of goods from the world’s second-largest economy.

“China is the biggest macro risk globally. Our bottom line is that we see demand growth slowing further, with some destocking likely, and have yet to see the policy response to cause [Purchase Manager Indexes] to stabilize. We would stress, though, that we do not believe China has run out of policy flexibility, and do not see the preconditions in place for a hard landing,” the analysts wrote.

Credit Suisse joins a number of other forecasters tempering expectations for this year.

J.P. Morgan this week lowered its S&P 500 price target from 3,100 to 3,000. Piper Jaffray, usually one of Wall Street’s most optimistic firms, this week reiterated its 2,725 price target for a year that it expects to be “rangebound” for the large-cap market index.

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