DOW After The Rally
(Tue, 2 Jun 2020). The Dow is riding a two-month rally, bringing it to within 13% of its all-time high. Analysts are divided about what happens next.
CNBC’s 2020 Global CFO Survey reveals an extremely bearish outlook on the U.S. stock market, with more than half of respondents calling for the Dow to return below 19,000. The CFO outlook contradicts new forecasts from Goldman Sachs and Bank of America, whose models predict higher stock valuations. Stocks are coming off their second straight monthly advance. The Dow and broader U.S. stock market ended May with a second straight monthly gain, as investors continued to bet on a full economic reopening in the second half of the year. But the rally could be short-lived as consumer demand remains subdued, according to a new survey of chief financial officers (CFOs).
CFOs Say Double-Dip Is More Likely
The Dow Jones Industrial Average is more likely to retest its March bottom below 19,000 before reaching another record high, according to CNBC’s Global CFO Council Survey. Fifty-one percent of respondents believe this crash scenario will play out versus only 22% who say the Dow will reach a new high before experiencing a significant drop.
CFOs in Europe, the Middle East, and Africa (EMEA) are the most bearish on stocks, with 70% forecasting a return to bear-market lows. The dismal outlook is attributed mainly to negative perceptions about consumer spending and supply-chains, a sign that business leaders believe negative fundamentals will soon catch up to equity valuations.
Consumer spending accounts for more than two-thirds of economic output. CNBC’s survey is not without limitations, as only 41 of 130 council members participated. The study was conducted between May 14-28.
Goldman Sachs, Bank Of America Turn Bullish
The survey also seems to contradict new models by some of America’s largest financial institutions. On Monday, Bank of America said there’s a more than 90% chance equity markets will be higher one year from now. Ironically, the bullish outlook stems from BoA’s “Sell Side Indicator,” which shows strategists are getting bearish on the market. But the indicator is contrarian, which means extremes in sentiment signal the market will go in the opposite direction.
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Goldman Sachs has also reversed its pessimistic outlook on the stock market. The Wall Street investment bank sees downside risk for the S&P 500 capped at 2,750–12.7% higher than the prior estimate of 2,400. Strategists led by David Kostin believe monetary and fiscal support will limit downside and keep valuations higher.
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