(Bloomberg) — From the war in Ukraine to rising interest rates and a global recession, investors are scrambling for safety as risks mount. They have found it in the US stock market – especially in the largest US companies.
The S&P 500 index is up more than 8% over the past two weeks, recouping all of its losses since the Russian invasion in February. 24. Meanwhile, the tech-heavy Nasdaq 100 has gained about 11% over the same period. With earnings looking strong and the corporate outlook improving, there is reason to think that these gains may be sustained despite the myriad risks facing global equities.
“It pisses people off because they think the market is ruthless,” Nancy Tengler, chief executive and chief investment officer at Laffer Tangler Investments, said in a phone interview. “And that’s fine.”
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The fight pushed up commodity prices, fueling inflation that was already at a four-decade high. Meanwhile, sanctions on Moscow threaten to impact global economic growth. Recession risks in the US are also rising, with parts of the Treasury yield curve turning upside down as the Federal Reserve embarks on a new tightening cycle.
Perhaps most surprising of all is that the world’s biggest stock markets haven’t collapsed yet. The STOXX Europe 600 Index is basically flat since Russia invaded Ukraine. The MSCI AC Asia Pacific Index is down a little more than 3% over that period and the Nasdaq Golden Dragon China Index is down about 7.5%, mainly due to growth fears and the risk of Chinese firms exiting US exchanges.
For now, US stocks appear to be the best option for global investors, especially compared to bonds. According to Bank of America, the return on global government debt, weighted by world GDP, is on course for its worst year since 1949.
“The idea is that we should only move around in areas that are more conducive to the situation, because there’s really no substitute for equities,” said Wallachbeth Capital managing director and senior strategist Ilya Feagin.
Large-cap stocks in the US offer more protection and value than small and mid-cap stocks because they generate reliable income for investors, especially companies that can sustain dividend payments. In addition, the tilt of US equity markets to start the year could be due to rising oil prices and moderating economic growth, meaning they are no longer as expensive, according to Tangler.
“American large-cap stocks are a haven because they’re reliable producers and don’t have a ton of debt,” Tengler said. “This is an opportunity to bring high quality companies on sale.”
Another phase of support for US stocks is improving expectations for first-quarter S&P 500 earnings-per-share growth, which has risen for three consecutive weeks, according to Bloomberg Intelligence.
“It appears the stock price is under near-term geopolitical and interest-rate risks,” Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, wrote in a note. “Earnings forecasts are climbing again, as analysts feel more comfortable with supply-chain risks and revenue projections continue to improve.”
Investors are also finding comfort in American corporations thanks to the huge piles of cash on their balance sheets that have accumulated during the pandemic. As a result, US companies are taking share buybacks to record. According to the S&P Dow Jones Indices, S&P 500 firms bought back $882 billion in stock last year, up 9.3% from the prior record set in 2018.
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In addition, some of the biggest tech names like Apple Inc., Google parent Alphabet Inc. and Microsoft Corp. Stay below the year, providing opportunities to buy shares that weren’t there long ago.
“Big tech has shown resilience, especially in FAANG names,” Eric Bailey, executive managing director of wealth management at Steward Partners Global Advisory, said in an interview. “Investors see some of those stocks down at least 20% as a buying opportunity. Cyber stocks have also been a bright spot, while Semis are attractive because they are the backbone of the digital world. ,
That being said, there are still risks as historical bearish indicators are giving investors warning signs but sending mixed messages. The gap between yields on two-year and 10-year Treasuries has narrowed, while the gap between 10-year and three-month Treasuries has actually widened. Both measures have predicted recessions in the past.
From a technical perspective, the S&P 500 is now at a turning point, having pulled back above its 200-day SMA. If it can sustain above that level and extend beyond the February high of 4,590 (currently around 4,543), it could signal that the market is on an upside. If it fails, however, it would be a sign that a counter-trend rally is imminent.
“History shows that markets initially see a significant drop on concerns about a war. Once the act is in place, there is often a recovery,” Bealy said. “What can change my mind? Something bad is happening. We don’t know how things will end between Russia and Ukraine. This is a big concern. Does it escalate or get worse?”
-With the help of Ishika Mukherjee.