The Bull and Bear Debate in US Stocks: Goldman Sachs Goes Long, the Most Pessimistic Analyst Surrenders, and the Most Accurate Analyst Harnett Insists on Being Bearish.

Recently, the US stock market has been rising continuously. This week, the NASDAQ Composite Index hit its longest consecutive rise in over three years, while the S&P has risen for four consecutive weeks. However, the market has mixed views on whether the rebound will continue.

Currently, "bearish" Goldman Sachs' David Kostin and Bank of America's Savita Subramanian have surrendered and switched to the bullish camp.

Goldman Sachs has raised its expected S&P 500 index for 2023 from 4000 points to 4500 points, while Bank of America claims that the bear market has officially ended and that the S&P 500 index will reach around 4300 points by the end of this year, which is not far from the current price.

However, "the most accurate analyst" Bank of America analyst Michael Hartnett still insists on a bearish view, believing that the logic behind the rise in US stocks is not sustainable.

Goldman Sachs turns bullish, and the market will rise another 5% before the end of the year

David Kostin, chief US stock strategist at Goldman Sachs, has joined the bullish camp and raised the expected S&P 500 index for 2023 from 4000 points to 4500 points, which is a 5% increase from the current level.

Kostin believes that in the case of a soft landing in the US economy, the forecast for earnings per share in 2023 is $224, which is much higher than the consensus forecast of $206.

Regarding the logic behind the continued rise of the US stock market, Kostin gives two reasons: first, AI provides support for corporate profit growth, and second, the small probability of a recession also provides upward momentum for the US stock market.

Regarding AI's support for the US stock market, Kostin pointed out in the report:

Our estimate of AI's productivity enhancement suggests that AI may increase the annual EPS growth rate of the S&P 500 index to 5.4% in the next 20 years, which is 50 basis points higher than the current dividend discount model. Based on the current discount rate, this additional growth will increase the fair value of the S&P 500 index by 9%. The recent narrowing of market breadth and the current valuation of some AI beneficiaries indicate that some of the future returns have already been priced in. Overall, the recent performance of cyclical and defensive sectors seems to reflect the improvement in growth expectations, which is consistent with our forecast of 1.7% real GDP growth in the US this year.

In addition, Kostin's other bullish support is the low probability of a recession:

Our economists believe that the probability of an economic recession in the next 12 months is 25%, while the market's median forecast is 65%. Under the basic situation of a soft landing, it is expected that the earnings per share of the S&P 500 index will increase by 1% in 2023, reaching $224, which is much higher than the consensus forecast of $206. After the first quarter earnings season, we still believe that the worst earnings season has passed, and the trajectory of analyst profit forecasts has indeed improved in recent weeks. For 2024, we believe that the consensus expectation of $246 (+11%) is too high, and we have a downward revision of about 4%, with an expected EPS of $237 (+5% growth) for 2024.

Most pessimistic analyst surrenders: S&P 500 index will close near 4300 points

One of Wall Street's most pessimistic analysts, Savita Subramanian, chief strategy analyst at Bank of America, has also turned bullish, declaring the bear market officially over.

Subramanian now expects the S&P 500 index to close near 4300 points by the end of this year, not far from current prices. In a report on Friday, Subramanian said:

The bear market is officially over. Sentiment, positioning, fundamentals, and supply and demand support indicate that underinvestment in stocks, especially cyclical companies, remains the main risk today, but overall, the direction of U.S. stocks is still more likely to be positive.

Historically, after breaking out from the bottom and rising 20%, the S&P 500 index has a 92% chance of continuing to rise in the next 12 months (compared to an average of 75%); based on data since the 1950s, the average return of the S&P 500 index in this case is 19% (compared to an overall average return of only 9%).

We believe we are back in a bull market, which may be part of what investors need to be enthusiastic about U.S. stocks again.

Subramanian's bullish reasons are that after a rapid rate hike cycle, the Fed has room to relax its policies, and stock risk premiums may begin to decline.

The reason why U.S. stocks will enter a bull market is that although interest rates are rising, the volatility around interest rates has already declined, the profit uncertainty that is technically in decline but not as severe as expected has also declined, and companies that are sensitive to profit margins are cutting costs. Moreover, after more than a year of rate hikes, the Fed seems ready to pause or even stop tightening policies.

Most accurate analyst Harnett insists on bearish view

As the bears turn bullish, Michael Hartnett, the most accurate analyst on Wall Street since last year and a Bank of America strategist, remains bearish, saying that the logic of the U.S. stock market's rise cannot stand, and that "fear of first-quarter economic recession" is turning into "greed for the second-quarter blonde." Hartnett said that rising interest rates and the upcoming liquidity decline are the main negative risks that long positions in bonds, artificial intelligence, technology stocks, and EU luxury goods will face in the third quarter:

Multiple central banks unexpectedly leaned towards hawks, the Bank of England unexpectedly raised interest rates, and the Reserve Banks of Australia and Norway restarted interest rate hikes after a brief "pause", causing Australian/Canadian 2-year bond yields to soar to 12-year and 16-year highs. Hartnett still believes that the Fed has not yet completed its interest rate hikes.

Another bearish factor is the "exhaustion of liquidity," as Hartnett previously pointed out:

With global central bank QT and the US Treasury's TGA account replenishment, global liquidity will decrease by more than $1 trillion in the next 3-4 months, possibly close to $1.5 trillion.

In addition, Hartnett observed that although fund flows into US stocks have slightly rebounded in recent weeks, most of the new funds have flowed into the money market (cash), namely:

The most prominent asset allocation for investors in 2023 is long cash, long investment-grade bonds, and short stocks. The inflow of investment-grade bonds has grown by more than $100 billion this year, while the flow of stocks has remained basically flat since February 22.

Last week's fund flow situation was $70.6 billion flowing back to cash, $13.4 billion flowing into bonds, $7.7 billion flowing into stocks, and $500 million flowing into gold.

It is worth mentioning that Hartnett reiterated his bearish factor, that the biggest "painful trade" in the next 12 months is the federal funds rate reaching 6%, not 3%.