With first-quarter earnings season approaching, investors are entering a delicate phase

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The runaway train that is the U.S. stock market has now been rattling along so far and so fast that some investors are wondering whether they can hop off without breaking a limb.

It is a tricky manoeuvre. The S&P 500 index of blue-chip U.S. stocks has just wrapped up the first quarter of this year with a gain of 10 per cent, on top of the 11 per cent climb in the final quarter of last year.

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A few European indexes, such as Germany’s Dax and Italy’s FTSE MIB, can match or even beat that in local currency terms, and Japan remains in go-go mode. Even the United Kingdom’s FTSE 100 is edging to its own record high, with all the grace of Mr. Bean on ice skates, in a force 10 gale, carrying two bowls of custard, in the dark. A win’s a win, but at more like three per cent, first-quarter gains there are much more modest.

But the scale of the U.S. ascent and the sheer weight of the market capitalization behind it (Apple Inc. alone is almost twice the size of the Dax, for example) means this is the one that matters. And it seems unstoppable.

Goldman Sachs Group Inc. is even sketching out a plausible path for the S&P 500 index to stretch as high as 6,000, some 14 per cent above where it is now, if “megacap exceptionalism” continues unabated. That is not the bank’s base case, but with its target of 5,200 for this year already in the rear-view mirror, chief U.S. equity strategist David Kostin is laying this out as a potential framework for superbulls.

“The weirdness continues,” Andrew Pease, chief investment strategist at Russell Investments Group LLC in London, said. “The way things have shifted is weird.”

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The neck-snapping turn in market expectations around interest rate cuts from the United States Federal Reserve — from six cuts priced in at the start of the year to three now — has failed to leave a dent on stock market performance.

Money managers with a more downbeat view of where markets were heading were increasingly giving up and hopping along for the ride, Pease said — all of which nags at the nerves of those who wonder if this has gone too far. But for his long-term focus, with lots of pension fund clients, it does not nag loudly enough to demand action.

“It’s hard to have a strong view right now,” he said. “This will end when either the last bear has been dragged in, which has not happened yet, or the market gets smacked by a piece of information — and that could be a while away.”

This sentiment also comes across from France’s Edmond de Rothschild Asset Management, which has recently trimmed its equity exposure to slightly underweight relative to benchmarks.

“It was not an emergency to cut risk,” Benjamin Melman, chief investment officer at the family-owned group, said. But he is “puzzled” by the market’s willingness to brush off signs of rising inflation in the U.S. and unnerved by what he called a “bubbly environment” dominated by a glassy-eyed belief in American exceptionalism.

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“Investors in the U.S. are convinced that the U.S. tech sector cannot be challenged,” said his colleague Jacques-Aurélien Marcireau, who has been covering global technology for 15 years. “European investors are more afraid.”

So, the dilemma is pretty clear. Investors — professional or retail — can either decide the trend is their friend and stick with something their instinct says is looking stretched, or take a heroically contrarian call that the rally is all about to end in tears and bet on a decline. The latter is a particularly painful bet to get wrong.

One investment house that knows that feeling is GMO LLC, which is famed for its warnings over the years of “meat grinder” crashes heading towards U.S. stocks. Now, Ben Inker, co-head of asset allocation there, declares that there’s “a lot we are excited about,” but not in the popular places.

“It’s just harder and harder to get excited about owning the S&P 500 because of how well that index has done, how high the valuations are,” he said. “There’s no guarantee the U.S. megacaps are going to go down tomorrow; just when you look at them, we think you don’t see really good returns from here.”

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Instead, he’s looking at “deep value” stocks in Europe and elsewhere that he thinks present some startling opportunities.

As Inker acknowledges, if the big U.S. stocks fall over for whatever reason, cheaper bits of the global stock market will fall over, too. So, to some extent, these are two sides of the same coin.

All this means that, especially with U.S. first-quarter earnings season approaching in April, investors are entering a delicate phase.

“Top asset managers are not saying ‘I’m king of the world’ and throwing money everywhere,” Alain Bokobza, head of global asset allocation at French bank Société Générale SA, said. “They are still rigorous and disciplined.”

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All roads still lead to the U.S., he said. He thinks the index is heading to 5,500 if the macro environment remains broadly stable and the bond markets remain nice and calm.

But the constant push higher in U.S. stocks is “dangerous” because it is such an entrenched consensus trade, he said. “If you stick with it, you are not being careful, so it’s about when you activate the de-risking. This is the art of asset allocation.”

© 2024 The Financial Times Ltd.

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