Marci McGregor, senior investment strategist at Merrill and Bank of America Private Bank, thinks Wall Street is overplaying its hand of late.
“I think consensus is just a bit too optimistic about 2023. We've seen cuts to forecasts for the second half of this year, but we haven't seen meaningful cuts for 2023. And I think that's going to play out when we get to the fall,” McGregor told Yahoo Finance Live.
“We're forecasting about a 1% pickup in unemployment. I think the consumer will stay pretty firm throughout this and that's why we're saying it's mild. I think this is going to be more about corporate profits. We're forecasting about an 8% negative year-over-year (YoY) growth rate next year. And that's what I don't think the market has priced in yet,” McGregor added.
Unemployment and corporate earnings have been beating market expectations despite historically-high inflation and rising interest rates. The unemployment rate dropped to 3.5% per July’s jobs report, and 68% of S&P 500 companies have beat earnings-per-share (EPS) estimates.
Given the market’s current trajectory, McGregor endorses the idea of being a “patient bear.”
“You do have to be patient in bear markets. You know, the worst may be behind us, but we're staying on guard because I think you're gonna be in this kind of wide-range bound market for some time. Again, until we get kind of more clearance on the macro-front, [and] more reset on the earnings–front,” McGregor said.
McGregor also suggests a diversified portfolio to defend against volatile macroeconomic conditions.
“I think that means sticking to higher quality investments, things like dividend payers. I know it's not the most exciting story out there. And then finding a balance when it comes to sectors. We still like sectors like energy, which have been really doing the heavy lifting in terms of earnings, but I would balance that out with more defensive areas like utilities, healthcare, even consumer staples to give that balance back to the portfolios,” McGregor explained.
The energy sector has been on an endless run of gains. The S&P 500 Energy (Sector) (^GSPE) is up 38% year-to-date (YTD). Other sectors, like Consumer Staples and Utilities, have made a comeback in the latter half of 2022. The S&P 500 Consumer Staples (Sector) (^SP500-30) is just down 1% YTD, and S&P 500 Utilities (Sector) (^SP500-55) has returned 7% YTD.
Yaseen Shah is a writer at Yahoo Finance. Follow him on Twitter @yaseennshah22