Tear off the gorgeous AI cloak. Do U.S. stock investors really believe in the "little essay" of a soft landing?

Original source: Financial Associated Press

Image source: Generated by Unbounded AI‌

If people put aside all the enthusiasm for artificial intelligence, they may find that in the current U.S. stock market, people’s confidence in U.S. economic growth is far less strong than imagined.

Banks and industrial stocks have been particularly dismal, faltering even as companies like Tesla and Nvidia have doubled and tripled. The equal-weighted S&P 500 index is up just 4% so far this year, eroding the influence of large-cap stocks.

**In fact, if you exclude those AI-themed stocks, the S&P 500 Index will essentially still be struggling this year as it was last year. **

**Also worrying is the performance of small-cap stocks, and a set of comparison charts also show worrying signals that have been rarely seen in the past 20 years. **As shown in the chart below, the small-cap index Russell 2000 has lagged the larger Russell 1000 index for the second month in a row, and the underperformance may be the second highest since 1998.

While top-heavy U.S. stock gains like this year’s usually lead to praise for the tech sector, there’s a less optimistic explanation: Aside from a small group of artificial intelligence winners, most market participants still don’t believe in the economy. Those “little essays” that can maintain the momentum of recovery in the long term and achieve a “soft landing” for the U.S. economy may not have such a large audience.

Matt Miskin, co-chief investment strategist at John Hancock Investment Management, said, “There are still cracks under the surface of the market - from financial stocks to broader small-cap stocks underperforming, you can barely see this market. The breadth of that. Frankly, it looks more like a series of churnings within the market, with the top companies doing the best and other smaller companies underperforming.”

It’s worth noting that historically, small-cap stocks have tended to outperform during periods of economic recovery and sell off during periods of economic stress. Given that most of these companies’ sales are generated in the United States, foreign investors often view them as “canaries” in judging the health of the economy. **

This time, although many market participants are more confident that the economy will achieve a soft landing, it is obvious that in areas where the market is relatively fragile, this optimistic view is far from unanimous. As the broader market rallies on the back of tech giants, many smaller companies are not participating in the rally.

Liz Ann Sonders, chief investment strategist at Charles Schwab, pointed out that 11 months have passed since the S&P 500 rebounded from its October low, but only about 40% of the Russell 2000 index’s constituent stocks are above the 200-day moving average. In contrast, when the market bottomed out in 2020, more than 90% of constituent stocks crossed this long-term moving average threshold during the same period.

**The “little essay” about soft landing is not credible? **

**In recent weeks, there has obviously been a lot of “little writing” about the hope of a “soft landing” for the U.S. economy. Some industry players are reassessing their forecasts for the U.S. economy as a series of stronger-than-expected reports in recent months, from consumer spending to residential investment, pointed to strength in several areas of the U.S. economy. .

Goldman Sachs is one of them. Earlier this month, the Wall Street bank lowered its forecast for the probability of a U.S. recession in the next 12 months by 5 percentage points to 15%.

**However, these optimistic forecasts are not without their own risks. **While many U.S. economic indicators have been strong recently, the bad news is that August’s inflation gauge was also higher than expected. Economists surveyed by the media predict that the Fed is likely to raise interest rates once more during the rest of the year and may keep interest rates at peak levels for longer than previously expected.

** Matt Maley, chief market strategist at Miller Tabak+, said, “The stock market is smelling some signs of the future that the data does not show now. Remember, most data such as retail sales are lagging, while the stock market is forward-looking. of.”**

“With interest rates at 15-year highs and student loan forgiveness set to end in a few weeks, consumers appear to be no longer as bullish as they have been for much of the year,” Maley noted.

A team of strategists at Bank of America, led by Michael Hartnett, is currently advising defensive-minded clients to buy dips in assets that have priced in a rapid decline in economic growth, such as regional banks and small-cap stocks.

He wrote in a note that investors should go long assets that are already pricing in a “hard landing” because they will have less to lose in a future recession and will have a lot to lose once the economy does not. Big room for growth.