Bloomberg News
Equity Strategists: Top-Ranked Analysts Become the Most-Bearish
2006-05-25 15:16 (New York)
By Daniel Hauck and Brian Sullivan
May 25 (Bloomberg) -- Wall Street's top-ranked equity strategists, Francois Trahan of Bear, Stearns & Co. and Abhijit Chakrabortti of JPMorgan, are also the biggest bears on the U.S. stock market.
Trahan, the No. 1 rated U.S. strategist in last year's survey by Institutional Investor magazine, cut his 2006 forecast for the Standard & Poor's 500 Index by 11 percent to 1200 this week, just above Chakrabortti's 1190 estimate, which is the lowest among 14 strategists polled by Bloomberg News.
``I have been worried about the performance of the equity market for a while now,'' Trahan, 37, said in an interview in New York today. The pullback ``is really about economic growth and economic growth slowing.''
Chakraborrti, who serves as both U.S. and global strategist at JPMorgan, was ranked the best analyst of world markets in the last two Institutional Investor surveys.
If the two are right, the S&P 500 will finish down as much as 4.7 percent this year. A retreat this month from five-year highs has pushed the index on the verge of giving up its 2006 gain as investors grow increasingly concerned inflation is rising, while profit growth is slowing.
Their outlook contrasts with strategists such as Ed Keon of Prudential Equity Group LLC and Abby Joseph Cohen of Goldman Sachs Group Inc., who defended owning equities this week on the premise that profits will continue to rise enough in the face of higher interest rates.
Keon and Cohen each maintained their forecast for the S&P500 to reach 1410 and 1400 respectively this year. The index closed yesterday at 1258.57 more than 10 percent below those estimates.
Growth Will Slow
Profits increased for S&P 500 companies by 14 percent in the first quarter, according to Thomson Financial. That's the 11th consecutive period of growth above 10 percent and the second-longest streak since 1950. Analysts expect companies to extend that streak to a record 14 quarters the rest of the year.
Chakrabortti, 38, said the economy doesn't have the strength to support a record profit expansion and sees earnings growth slowing to ``virtually zero'' by the end of the year.
``We're entering a very difficult period for stocks,'' Chakrabortti said yesterday from New York. ``The economy and earnings are going to lose growth momentum, and at the same time inflation is going to pick up.''
The strategist has been responsible for global equity strategy for JPMorgan, the No. 3 U.S. bank, since 2000 and moved to New York from London in April 2005 to focus more on U.S. stocks.
Bernanke & Inflation
Chakrabortti said he also expects the Fed to raise the benchmark lending rate as high as 6 percent from the current 5 percent, in part because new Fed Chairman Ben S. Bernanke will have to establish his credentials as an inflation fighter.
``This is a Fed that has to be more biased towards fighting inflation rather than a balanced view between growth and inflation,'' Chakrabortti said. ``That is because of the change in stewardship in the Fed.''
A government report lifted stocks today by suggesting to investors that the economy is indeed expanding without sparking too much inflation.
Gross domestic product increased at a 5.3 percent annual rate, faster than the government first estimated, yet slower than the median forecast from economists of 5.8 percent.
The S&P 500 rose 9.87, or 0.8 percent, to 1268.44 as of 2:15 p.m. in New York, its first back-to-back gain in two weeks.
Global Calls
Chakrabortti was too pessimistic in 2005, predicting a second-half decline of about 7 percent. The S&P 500 rose 4.8 percent in that period. His original 2006 S&P 500 forecast was even lower, at 1125. He's the top global strategist because of calls on countries such as Japan. In July, he said Japanese stocks may outperform those in the rest of the world. The Nikkei 225 Stock Average has since climbed 31 percent.
Trahan was too bearish last year as well, lowering his 2005 S&P 500 forecast at midyear to 1150, 7.8 percent below its eventual close. The strategist said investors are too optimistic about an end to the Fed's rate increases.
Previous rallies that followed a Fed stoppage were spurred by a decline in bond yields, according to the strategist. Stocks this time are unlikely to get the same boost with yields historically low, he said. The yield on the 10-year Treasury note is at about 5.08 percent, below the average yield of 6.3 percent the last 20 years.
``People believe that once the Fed is out of the way the market will soar,'' Trahan said. ``Unfortunately, I think we're in for a rough ride here.''
