Prepare for a pullback and a disappointing earnings recovery, analysts warn

Stocks are looking vulnerable to a pullback following a rally that has dovetailed with disappointing earnings and understated political risks, according to analysts.

The S&P 500 has risen about 9 percent to 2,180, hitting a number of new all-time highs along the way, following a brief dip after Britain voted to leave the European Union. The rally has confounded expectations for a more prolonged sell-off prior to the referendum.

Edward Campbell, managing director at investment strategy firm QMA, said surging stocks have been driven by expectations that central banks will further ease monetary policy to offset the negative impacts of Brexit, a move that has boosted stocks in the past.

“It really hasn’t been supported by an improvement in corporate fundamentals,” he told CNBC’s “Squawk Box” on Tuesday.

“So I think heading into the fall we’re going to be vulnerable to a pullback here,” he said. The trigger will likely be hawkish comments from Federal Reserve officials as U.S. policymakers prepare to raise interest rates, he added.

With a recession unlikely in the near term, Campbell said he’s not expecting a sustained sell-off, but he’s not anticipating impressive gains for the next couple of years either. In his view, stocks will return about 5 to 6 percent.

To be sure, many investors expect U.S. companies to emerge from an earnings recession in the coming months, but Campbell said that is still “more forecast than fact.” With corporate profit margins narrowing, there is a lot of room for disappointment, he added.

Julian Emanuel, executive director of U.S. equity and derivatives strategy at UBS, said Tuesday the market is pricing in too little political risk ahead of the U.S. election and an October referendum in Italy to change the country’s constitution. Further, with stock valuations sitting near a 10-year high, equities have little wiggle room, he said.

While Emanuel believes markets will likely be free to rally once Americans cast their ballots in November, he, too, said the market could be disappointed in the earnings recovery.

“The market currently expects earnings growth of near 14 percent. UBS is looking for something like 6 percent. There’s an adjustment period between reconciling those two numbers. We think expectations are overly optimistic,” he told “Squawk Box.”

This entry was posted in Markets. Bookmark the permalink.

Leave a Reply