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Jan. 14, 2020, 10:54 a.m. EST

Beware of investors piling into stocks and hope for a steady grind higher instead, says strategist

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By Barbara Kollmeyer, MarketWatch


AFP via Getty Images
Slow and steady wins the race

Ready or not, here comes earnings season.

Wall Street anticipates a 2% year-over-year decline in fourth-quarter S&P 500 earnings, versus the 2.5% gain predicted at the start of that quarter, according to FactSet estimates . Financials, though, are expected to be a bright spot in that mix, and JPMorgan Chase has kicked it off with some upbeat results on Tuesday.

The week kicked off with some fresh stock records and trade hopes, so no pressure right?

Our call of the day , from Mark Luschini, chief investment strategist at wealth manager Janney Montgomery Scott, cautions that a lot needs to fall into place for equities this year, and the last thing investors want is an overexcited stampede into this market.

“If again we experience a FOMO (fear-of-missing-out) environment in which the [S&P] market rockets up to 3,500 and we’re at 20 times forward earnings and that global recovery story doesn’t develop and the dollar strengthens as a consequence of it,” then that will hurt the earnings picture and leave stocks vulnerable, he told MarketWatch in an interview.

The S&P 500 is currently trading at 18 times forward earnings, which isn’t unreasonable, he notes, but he says equities can’t keep going up in the absence of some positive development on the earnings front. That’s after last year’s “remarkable” 28% return for the S&P 500 that was due largely to a rise in price rather than steady earnings growth, he notes.

“Certainly I would prefer kind of a grind higher that allowed the fundamentals to continue to grow in a way that is commiserate with the rise in equity prices, one is sort of validating the other,” said Luschini. And that is as politics and trade issues are expected to remain a focus this year.

“Anything can happen. There are things that can undermine this economy or at least the stock market that I’d be a little bit prepared for at least by way of not assuming making money in 2020 is going to come as easily as it did in 2019,” he said.

Read: Trader revisits Ray Dalio’s laughable cash call and warns of similar drop

The market

The Dow /zigman2/quotes/210598065/realtime DJIA +2.24%  , S&P /zigman2/quotes/210599714/realtime SPX +2.28%   and Nasdaq /zigman2/quotes/210598365/realtime COMP +1.72%   are mixed, while European stocks /zigman2/quotes/210599654/delayed XX:SXXP +0.42% struggled and Asian markets /zigman2/quotes/211618636/realtime XX:ADOW +0.20% finished mixed.

The chart

Investor equity exposure is getting higher and higher, as shown by our chart from Deutsche Bank, which says that positioning is now in the 96th percentile.

“Equity positioning, like the market itself, has run far ahead of current growth as investors price in a global growth rebound,” said a recent note from chief strategist Binky Chadha and a team at the bank.

/zigman2/quotes/210598065/realtime
US : Dow Jones Global
21,413.44
+469.93 +2.24%
Volume: 534.67M
April 2, 2020 5:11p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
2,526.90
+56.40 +2.28%
Volume: 3.87B
April 2, 2020 5:11p
loading...
/zigman2/quotes/210598365/realtime
US : U.S.: Nasdaq
7,487.31
+126.73 +1.72%
Volume: 3.17M
April 2, 2020 5:16p
loading...
/zigman2/quotes/210599654/delayed
XX : STOXX
312.08
+1.31 +0.42%
Volume: 0.00
April 2, 2020 5:50p
loading...
/zigman2/quotes/211618636/realtime
XX : Dow Jones Indices
2,677.41
+5.29 +0.20%
Volume: 0.00
April 2, 2020 9:52p
loading...
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