Brendan McDermid/Reuters
- Stocks are set to rally in the second half of the year, according to BMO strategist Brian Belski.
- That's because the market is flashing disinflation signals, suggesting the Fed will cut rates soon.
- Rate cuts are expected to fuel a rally in stocks, with some commentators predicting a 20% upside in 2023.
Stocks are set to rally in the second half of the year, and it's wrong to assume that market prices have already peaked, according to BMO's chief investment strategist Brian Belski.
In an interview with CNBC on Tuesday, Belski pointed to the thesis often made by bearish investors, who say that the momentum in stocks will die off in the second half of 2023 as the US tips into a recession.
That risk has been amplified with recent bank failures, experts say, as the collapse of Silicon Valley Bank last month has tightened financial conditions and made a downturn much more likely.
But bears are ignoring important forms of disinflation in the market, Belski said. Due to tighter financial conditions, the SVB failure will help control inflation. So will the strong performance of growth sectors in the market, such as tech stocks, which plunged last year under the pressures of rising inflation and interest rates.
"Stocks lead earnings which lead the economy," Belski said, suggesting disinflation signals in the market would eventually trickle down to the real economic data, as prices still remain well-above the Fed's 2% target. "If and when we see the softness in the economy … the Fed is going to cut rates."
Analysts expect a cut in interest rates to be bullish for stocks. Central bankers raised rates over 1,700% in the past year to control inflation, a move that's significantly tightened financial conditions and led to a 20% decline in the S&P 500 last year. A Fed pause in rate hikes or a pivot to rate cuts will likely fuel a rally, bullish commentators say, with Fundstrat predicting at least a 20% upside for stocks this year.
Other market gurus have also made the case for the Fed to pause or cut rates soon, as the Fed risks overtightening the economy into a recession if they keep rates too restrictive for too long. Though central bank chief Jerome Powell has communicated to markets that rates will stay elevated through the rest of 2023, markets are expecting significant rate cuts anyway, with investors pricing in a 38% chance of a 75 basis-point cut by year-end, according to the CME FedWatch tool.