We’re still not buying U.S. stocks, Societe Generale said, adding that upside for the S&P 500 is limited, with a growth and inflation rebound already priced in.
“Rising rates, political uncertainties (trades and mid-term elections in November) and a lack of supportive new catalysts (earnings momentum to run out of steam, share buybacks limited by leverage) should weigh on U.S. equities,” Societe Generale said in a note last week. “The expectation of an end of the U.S. economic cycle (in mid-2019/2020) should start to be priced in by end-2018.”
In a note titled “Don’t follow the herd,” the investment bank said it was sticking with its year-end S&P 500 target of 2500, which it called “clearly out of consensus,” with the Bloomberg median target at 2975. The bank’s second-quarter target for the index was 2700 and it tipped the index to stay in a 2500-2800 range for the rest of the year.
The S&P 500 index was up 0.47 percent at 2747.39 at 9:56 P.M. SGT on Monday.
The bank noted that U.S. companies have “strongly releveraged” their balance sheets, with gearing ratios now well above the previous equity market peak in 2007, just before the Global Financial Crisis.
“This has been a major driver of the wave of share buybacks. With rates on the rise and gearing ratios already high, we expect the share buyback cycle to slow in the coming years,” it said. “Don’t be fooled by the high quantity of share buybacks in 2018 ($270 billion year to date already), as this year has been fueled by tax reforms (including cash repatriation incentives).”