The recent decline in the yield on investment-grade corporate bonds has been “inconsistent,” according to the head of equities strategy, with the widespread worry that the S&P 500 will resume its decline and hit its October lows.
Additionally, strong balance sheets at the corporate and consumer levels point to a low degree of systemic risk, indicating that the trigger for a protracted market slump is largely absent, he continues.
“Bear markets often end when we see sharp tightenings and healthy issuance similar to what we have experienced over the last several months,” Harvey wrote in a note Monday. “When bear markets go ‘next level’ spreads widen, not tighten, as they have today. IG spreads support our views on systemic risk.”
Harvey declared the end of the 2022 bear market, joining a minority on Wall Street that included Ed Yardeni. After the S&P 500 fell 25% from its high to its trough, according to a Bloomberg MLIV Pulse survey conducted at the end of January, about 70% of respondents felt the stock market had not yet reached its bottom.
Harvey is less optimistic than Yardeni, who saw the equities rise that began in October as the beginning of a new bull market. He’s maintaining his S&P 500 year-end objective of 4,200, which is only 2.7% over Friday’s finish.
According to Harvey, even if the selloff has ended, the prerequisites for a long-term recovery—a steady increase in stock multiples and corporate earnings—are lacking, at least temporarily.
The S&P 500’s P/E ratio has already surpassed its 10-year average at 18.3 times earnings. The outlook for earnings is deteriorating at the same time. Since the end of October, analysts have decreased their 2023 projections for large American companies by 5%, to $220.70 per share, according to data gathered by Bloomberg Intelligence.
The bull is “stuck in traffic,” Harvey wrote.