SocGen Quants Skeptical on Stocks Amid ‘Wobbly’ Cyclicals Rally

(Bloomberg) -- U.S. stocks may be well off their mid-March lows, but Societe Generale SA's quantitative strategists are wary of the rally.

“From a market technical perspective, the cyclical recovery has been very volatile, wobbly, up one week, down the next, indicating the fragility of the market recovery,” Solomon Tadesse, head of North American equity quant research, said in an email May 31. “If this is a true economic recovery and if the March market plunge is the market bottom, we should see a clear and strong rebound in cyclicals.”

Cyclical stocks, those that benefit most when the economy is running hot, have shown some signs of resurgence. On Tuesday and Wednesday last week, the Russell 2000 Index outperformed the tech-heavy Nasdaq-100 Index by more than 2.5 percentage points only to lag behind by about 2 percentage points in each of the following two sessions. The Russell 1000 Value Index behaved similarly relative to its Growth counterpart.

“The worst may not be over for the market,” Tadesse and colleagues including Andrew Lapthorne wrote in a separate note May 28 that studied the past 100 years of market downturns and recoveries. While optimism about economic recovery might be spurring gains in cyclicals, the uncertainty about how the pandemic will end, and the timeline of potential vaccines, will limit their advance, they said.

SocGen's warning comes as Goldman Sachs Group Inc. on May 29 pared its forecast for further declines, citing the strength of stock gains and support from fiscal stimulus and monetary policy. Strategists led by David Kostin moved their downside S&P 500 forecast to 2,750, from a previous 2,400, compared with the May 29 close of 3,044.

Still, Goldman sees a number of reasons to be cautious on U.S. stocks, including lack of buybacks and narrow participation in the recent gains. Even JPMorgan Chase & Co., which made an early call that the worst was behind markets, tamped down its optimism on equities last week.

The situation further out in the future is promising, Tadesse said.

“In the medium term, as all clears up and economic recovery holds, I expect a significant cyclical rally, given also the depressed valuations,” he said.