Fear of one of the main economic threats – inflation – has returned to financial markets. Investors are watching the march of oil prices towards $100 per barrel with concern. Additional tensions are provided by technology companies, from which the biggest players on the US stock exchange are hastily withdrawing capital.
Goldman Sachs: Oil at $120 possible, although the main scenario is different
This week, Brent oil prices reached their highest level since the end of May due to the ongoing escalation of tensions on the US-Iran line. The rally in commodity prices already reflects not only fears of disruption of fragile supply chains through the Strait of Hormuz. A new threat was triggered by attacks by Yemeni Houthis in the Red Sea.
This last factor prompted experts to forecast Brent oil prices at above $110. However, even without attacks in the Red Sea, oil could rise to $120 in the fourth quarter of this year if transport disruptions persist.
– Escalation in the Middle East and a decline in oil flows from the Persian Gulf to below 45% of pre-war values are again pushing prices up – warn Goldman Sachs strategists.
A price of $120 per barrel of oil is not yet the bank's main scenario. Baseline forecasts assume that at the end of the year it will be $80, and next year $75, based on the assumption that geopolitical tensions will subside. However, analysts admit that the risk to these forecasts has clearly increased.
JPMorgan CEO: The risk is greater than others think
Investors are underestimating threats to the global economy. The list of geopolitical and financial risk factors is lengthening, and markets are not fully pricing them in.
– I think the risk is probably greater than others think – said Jamie Dimon, CEO of JPMorgan Chase, in an interview with CNBC, pointing to wars in Ukraine and the Middle East, US-China tensions, rising defense spending, and government deficits.
The head of the largest US bank admits that it is difficult to assess which of these threats are already priced into asset prices and which are not.
– Perhaps some are included in prices, but what is not, actually happens – says Jamie Dimon.
Dimon is particularly concerned about the state of US public finances. He claims that continuous US budget deficits will eventually lead to a day of reckoning and could result in higher interest rates. For this reason, he personally would not invest in long-term US Treasury bonds. Moreover, at current valuations, he would also not buy stocks, primarily meaning the broad market index. He would only consider buying individual securities if they represented an exceptional investment opportunity.
Goldman Sachs: First signs of capitulation are beginning to appear
The observations of experts from Goldman Sachs have once again come into focus. Bank specialists tracking trade and capital flows calculated that over the last two months, hedge funds have been selling US technology stocks at a record pace. In six of the last eight weeks, these entities have sold more securities than they bought.
– Given the continued high volatility and sharp sell-off in the semiconductor, memory, and AI infrastructure sectors, the intensity and scale of sales since the beginning of June indicate a significant reduction in positions by investors, and the first signs of capitulation are already beginning to appear – conclude Goldman Sachs strategists.
As market participants are increasingly skeptical of valuations in the artificial intelligence industry, recently the strongest sell-offs have been in shares of hardware manufacturers, data storage companies, and IT service providers. Bank specialists note that painful fluctuations in popular AI segment stocks are prompting investors to seek opportunities in other sectors.
S3 Partners: Short selling has intensified
Parallel to the exodus of funds from the US technology sector, short sellers are increasingly pressing on US stock exchanges. They borrow shares and sell them on the market, hoping to buy them back later at a lower price and profit from declines. This applies not only to the technology sector.
The share of shorted shares in free float among S&P 500 companies is currently 3.79%. This is the highest level since 2010, i.e., since the start of collecting this data by analytical firm S3 Partners. In the case of the broad Russell 3000 index, this percentage reached a record 6.3%.
The intensified short selling reflects anxiety about the further prospects of the US stock market after several months of dynamic gains. From the March war lows, the S&P 500 has rebounded by about 17%.
– Short selling has intensified, and the list of entities targeted has also increased – points out Ihor Dusaniwsky, analyst at S3 Partners.
Citigroup: The Magnificent Seven as a construct is dead
The once popular term describing the Magnificent Seven has ceased to be relevant in the context of US investments in artificial intelligence. Citigroup analysts recommend looking at a broader range of stocks, including the largest technology companies and key firms building AI infrastructure.
– The Magnificent Seven, as a construct for assessing the dynamics of large growth stocks, is dead – claim Citigroup strategists.
This is confirmed by price changes. A basket of shares from this group, which in previous years drove the S&P 500 to historic highs, is performing worse this year. The strongest gains are from entities benefiting from the huge spending of the technology sector on computing power. Since the beginning of the year, the Magnificent Seven has lost nearly 4% in value, while the S&P 500 has gained over 8%.
The group is also losing its raison d'être due to the crumbling correlations between its constituent stocks. Recall that the group consists of: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. For example, when Microsoft and Meta Platforms shares fell amid fears of the companies' huge spending on technology development, Apple's stock rose by nearly a fifth this year due to the decision to withdraw from the race to build data centers.
– When was the last time you thought about FAANG stocks? It's time to turn attention away from the Magnificent Seven in exactly the same way – summarize Citigroup analysts.
JPMorgan: In Europe, the improvement was the greatest
On global stock exchanges, the season for publishing financial results for the second quarter begins. Profit forecasts for European companies are currently being raised at the fastest pace in the world. Although upward revisions are also visible in the US and Japan, in the Old Continent these indicators are improving the most strongly. This is a rare phenomenon in Europe, where expectations for earnings have been regularly lowered over the past two years.
– A deeper look at changes in earnings per share forecasts shows that in the past quarter, the improvement was greatest in Europe – note JPMorgan analysts.
It is estimated that in the second quarter, European company profits increased by 12% year-on-year, the fastest pace in over three years. And although this dynamic is still half that of the US, it is Europe that leads in forecast revisions. It is expected that in the coming quarters, this growth will accelerate further. Analysts at Swiss bank UBS forecast that this year and next, European company profits will increase by about 25%.
The approach of financial markets to the prospects of European companies improved significantly in May after the achievement of a ceasefire between the US and Iran and the fall in oil prices. The strongest upward revisions are for the technology, utilities, finance, and industrial sectors.
HSBC strategist: The time will come to take your foot off the gas a bit
However, when the second quarter earnings season ends, investors should think about reducing risk due to the approaching November midterm elections in the US.
Excessive optimism and a high share of stocks in investment portfolios coincide with the fading of fiscal stimulus effects. Credit card data already heralds a slowdown in consumer spending in the United States. Combined with pre-election uncertainty, this could trigger a market sell-off. It is noted that the market effects of Donald Trump's great budget act – comparable to the stimulus from 2009 – were accumulated in the first half of this year, and in the second half, the benefits from it will be negligible.
– I believe that before the midterm elections, about a month or a month and a half after the earnings season, the time will come to take your foot off the gas a bit – said Max Kettner, strategist at HSBC, in an interview with Bloomberg TV.
The expert does not expect a bear market, but believes that the mentioned circumstances could trigger a correction of 5-10% around September and October.
– Then, after the midterm elections, it will probably be a good time to buy again – adds Max Kettner.
Source: Verslo žinios (Bonnier Group)
