HSBC Strategist Kettner: Wall Street Is Too Pessimistic on Stocks

Most of Wall Street is expecting further declines in equities in the first half of 2023. However, HSBC Bank Plc strategist Max Kettner is turning more optimistic.
The strategist raised the asset class to neutral, citing a “very strong” consensus around a recession and weak first-half for risk assets, signs of easing inflation, resilient economic growth, a reopening in China and the absence of a gas crisis in Europe.
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Kettner wrote in a note dated Jan. 9 that they are now beginning to invest more in risk assets. With most of the factors that would make this a more constructive investment now present, it no longer makes sense to wait for a weak first half.
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The strategist has a very different view than most of his counterparts, who have all warned that a recession is likely to make the annual stock slump even worse than it was in 2008, before a recovery in 2023. Money managers have also said that the rebound will be much smaller than expected, and that most of the gains will happen in the last six months.
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Kettner's view is based in part on the extent of bearish positioning among investors. He said expectations for both economic growth and corporate earnings are pessimistic for the near term, making it "hard to see significant downside surprises." He also expects inflation to cool faster than consensus forecasts, accompanied by an improvement in consumer sentiment.
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US stocks rallied sharply last week on news that the Federal Reserve could slow the pace of interest rate hikes. However, some of that optimism has been tempered this week after two central bank officials made hawkish comments. US stock futures edged lower on Tuesday as investors await remarks by Fed Chair Jerome Powell later in the day.
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Kettner said that the outlook for stocks is not good for the second half of the year, as it will be difficult for companies to meet earnings expectations. He believes that investors will start to take more risks in their portfolios, by investing in developed market sovereigns and defensive stocks, rather than cyclical stocks.
The strategist said they retained a preference for value stocks over growth, although the latter “could make a stronger comeback” later on in the first half if inflation cools more decisively.