Stock bulls getting antsy as Fed’s magic touch no longer enough

Bloomberg

Investors are starting to doubt that Jerome Powell’s magic dust can keep working miracles in equities.
The US Federal Reserve’s remarkably dovish stance got a polite but restrained nod from markets after trade tensions and profit woes returned to center stage. The S&P 500 Index fell 0.8 percent over the five days while the Stoxx Europe 600 Index posted the worst week this year as focus shifted to slowing economic data and President Donald Trump’s decision to keep China tariffs.
Yes, investors are surely grateful to Powell for this year’s $10 trillion global stock rally. But it’s not in the Fed’s power to reduce geopolitical risks, and for the rally to continue, earnings upgrades are needed ASAP, according to Karen Ward, chief market strategist for Europe, Middle East and Africa at JPMorgan Asset Management.
Analyst downgrades of global profit growth have outpaced upgrades since August, showing no signs of stopping.
Valuations aren’t helping, either. On a forward price-to-earnings basis, both the S&P 500 and MSCI World Index now trade near the levels they were at during the height of last year’s market rally.
“The valuation story in stocks that we saw at the start of the year is no longer compelling,” Ward said. “It’s very helpful if Powell pauses interest rates from here but there’s nothing he can do to determine whether the trade hostility eases or continues, and really it’s that that’s depressing global growth.”
Traders are starting to vote with their feet. After a short-term inflow into equities earlier this month, stock funds across all the major regions saw $21 billion exit in the week through March 20. Many investors have remained on the sidelines of this year’s rally after being burned at the end of 2018.
Bank of America Merrill Lynch strategists including Michael Hartnett went so far as to say that the gains in stocks have been driven “solely” by corporate buybacks, call options, short-covering and purchases of single stocks by retail investors — and not by general investor appetite for equity risk.
And major asset managers are starting to reduce their equity exposure. At Wells Fargo Asset Management, Brian Jacobsen, a senior investment strategist, said that although his multi-asset team has recently reduced its equity position from overweight to neutral, in the longer run the dovish monetary environment remains supportive of stocks.