Fidelity, American Century and Jefferies offer upbeat outlooks for second half of 2016

Big contrast with gloomy forecasts from BlackRock, State Street Global Advisers and TIAA

Aug 9, 2016 @ 1:13 pm

By John Waggoner

Reading most financial firms' outlook for the second half of 2016, you'd get the impression that the stock market is on a one-way toboggan ride to a desolate wasteland of low returns and high volatility. But a few companies have managed to produce (relatively) cheerful outlooks.

You don't have to look far to catch the gloom. BlackRock, State Street Global Advisors and TIAA Global Asset Management all came out last month with pieces cautioning investors not to expect too much from the stock market except more volatility. And investors have followed suit by consistently selling shares of U.S. stock funds.

At least so far, the advice hasn't panned out well. The Standard & Poor's 500 stock index is up about 4% since June 30. The VIX, the so-called Fear Index, is the lowest since the Taft administration. OK, it's the lowest since July 2014. And, while second-quarter earnings are 2.3% lower than they were in the second quarter of 2015, that's still better than the 5.2% decline expected at the beginning of earnings season. (Discounting the snake-bit energy sector, earnings would be up 2.8% year over year.)

And at least some analysts are starting to perk up a bit. Let's start with Fidelity, whose August insights notes that low bond yields imply low growth and low inflation. “What matters most is whether the outlook justifies the pessimism implied by record-low bond yields,” Fidelity's piece says. “To us, steadying trends in China and continued expansion in the U.S. make a modest positive surprise in both growth and inflation expectations the most likely scenario over the next 6-12 months.”

Fidelity notes that the economy is moving into its late cycle phase, which means rising wages and inflation. But, it says, “Late-cycle trends such as rising wages may cap profit growth, but fewer headwinds from oil prices and the dollar suggest an opportunity for earnings to surprise to the upside.”

The fun giant's advice: “Inflation-resistant sectors, such as energy and materials — which are trading at historically low relative valuations — tend to benefit from the inflationary dynamics of late cycles. Stretched valuations may make utilities and other bond proxies less helpful than usual in a late-cycle environment, particularly if interest rates rise.”

American Century shares some of Fidelity's optimism. “Fundamentally, in isolation, the U.S. looks OK,” the fund company says in its second-quarter outlook. “Higher interest rates appear justified, looking at U.S. economic factors alone and ignoring global conditions. Global macro headwinds are having more impact on the smaller manufacturing side of the U.S. economy than the larger services side, which is still expanding.”

Finally, Jefferies analyst Sean Darby notes that the current stock market rally, which began in February, hasn't been accompanied by a spike in margin interest — a typical sign of a speculative blowoff. And the rally has been extremely broad-based, another hallmark of a wobbly rally.

"US market breadth continues to improve," the Jefferies report says. "We would not recommend shorting the market."

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