Bulls’ Ranks Fall to Lowest in 3 Years as Stocks Hover Near Highs

The ascent of the S&P 500 Index (SPX) to one record high after another might look, on the surface, as a breakout of irrational exuberance among investors. But the opposite is occurring as investment managers become increasingly bearish. Only 49% of the 148 professional money managers recently surveyed have a bullish view of the market over the next 12 months, down from 56% in a fall 2018 survey. This is the first time that the bulls have been in the minority since the fall of 2016, according to the spring 2019 release of Barron’s Big Money Poll.

It’s also notable that 70% of respondents believe that stocks are fairly valued today, the highest percentage in nearly five years.

“It’s difficult to get excited about the sustainability of a market rally that consists of expanding valuations in a slowing or declining earnings environment,” as Marc Dion, chief investment officer (CIO) at Wisconsin-based Morgan Dempsey Capital Management, told Barron’s. Ingrid Hendershot, president and CEO of Virginia-based Hendershot Investments, agrees. “Mr. Market has had quite a run in the past three months, and we wouldn’t be surprised to see him take a bit of a breather here,” said Hendershot.

The poll results are summarized in the table below.

The Bulls’ Ranks Are Falling

(Professional Investment Managers Surveyed by Barron’s)

• Spring 2019: 49% expect U.S. stocks to rise in the next 12 months
• Fall 2018: 56% forecasted gains over the next 12 months
• Fall 2016: last time that less than 50% anticipated gains over next 12 months

The proportion of poll respondents who consider themselves to be outright bears has risen from 9% in the fall to 16% today, mirroring the drop in the bullish percentage. Meanwhile, the proportion that considers themselves to be neutral on the stock market is unchanged at 35%.

The bulls see the strongest U.S. job market in 50 years as a prime indicator of underlying economic strength. They expect corporate profits to continue growing at a solid pace, are hopeful that the U.S. and China finally will reach a trade agreement, and bank on a continued pause in interest rate hikes by the Federal Reserve. The bears, on the other hand, point to slowdowns in the growth rates of GDP and corporate profits, and worry that a recession could be triggered by policy mistakes. Indeed, 44% of respondents anticipate that a recession will begin in 2020, and 32% expect a contraction to start in 2021.

Even the bulls in the Barron’s poll are only modestly so. Their average forecast is that the S&P 500 Index will end 2019 at 2,946, which the market reached in intraday trading on Monday. The survey was e-mailed to participants in late March, after which the S&P 500 has gained another 3.7% so far in April. The bears are calling for a correction that brings the index S&P 500 down by about 12% through the end of 2019.

Morgan Stanley has led Wall Street in warning about shrinking corporate profit growth and the negative impact that this is bound to have on stock prices. They expect to S&P 500 to trade in a range from 2,400 to 3,000 for the rest of 2019, representing, respectively, a drop of 18.4% and a rise of 2.0% from the April 29 open. “1Q earnings results are mixed with a big beat rate on a lower bar and signs of lower capex,” they write in their latest U.S. Weekly Warm Up report. “We see the trough in EPS growth later this year and wouldn’t bet on a melt up with downward revisions ahead,” they add.

With the consensus earnings growth forecast for the S&P 500 in 2019 having shrunk from 10% to 3%, “rising valuations linked to easy money” have been the market’s propellant, per a Wall Street Journal column, and this “can vanish in one gulp if inflation expectations pick up again and investors start to prepare for the return of Fed rate increases.”

Interestingly, almost 75% of respondents believe that the tech sector is still a buy, but caution that investors need to look closely at the fundamentals of individual stocks. Ingrid Hendershot at Hendershot Investments, for example, sees reasonable valuations in some “old technology” stocks, but worries that some hot new IPOs, such as those for ride hailing services Uber and Lyft, may be too pricey.