REUTERS/Carlo Allegri
- Stocks will continue their rally until April - and then start feeling the pain of weak corporate earnings, Joe Terranova said.
- The veteran market strategist warned of the lagged effect of Fed rate hikes.
- "The first half of the year will be better than the second half of the year," he warned in an interview with CNBC.
The stock market has enough runway to continue its impressive rally until April, at which point investors should be ready to feel the pain of weak corporate earnings, Virtus' Joe Terranova said this week.
"I think there's upside potential for sure in the market," the veteran market strategist said in an interview with CNBC on Tuesday, predicting stocks would rally until companies report first quarter financials a few months from now. "I think the market has a runway though leading up to the next earnings report."
That's because Jerome Powell hasn't pushed back against the market's bullishness ,Terranova said, pointing to the Fed Chair's speech at the Economic Club of Washington earlier this week, where the top central banker reiterated his view that inflation was falling and spurred a sharp rally in stocks on Tuesday.
That's a change from Powell's more hawkish rhetoric in previous Fed meetings, when he repeatedly warned markets that the central bank still had more work to do in lowering inflation, with his remarks often sparking steep sell-offs in stocks.
But markets believe they have the end of the Fed's rate hike cycle in sight, and are pricing in just two more 25 basis-point rate hikes.
"I don't view the Federal Reserve right now as the adversary of the market," Terranova said, though he warned investors weren't completely in the clear. "I think the adversary of the market is the lagged effect of the rate hikes, and what does that do to earnings."
Other market commentators have warned of the consequences of aggressive Fed policy, as the effects of rate hikes could take months to fully be felt in the economy. With the Fed's target rate at 4.5%-4.75% – the highest rates have been since 2007 – the economy could end up in into a downturn later this year, experts have warned, sounding the alarms for a corporate earnings recession that could rival 2008.
In particular, Morgan Stanley warned that earnings expectations for 2023 are still about 20% too high, and stocks could plunge 24% in the first half of the year as companies feel the pinch of tighter financial conditions.
"The first half of the year is going to be better than the second half of the year," Terranova warned.