Hot stocks may go lukewarm in second half

Wall Street pros say market drivers will cancel each other out

The U. S. stock market is trading at record highs, but Wall Street pros — while still relatively optimistic — are dialing back expectations for the second half of 2016.

The market call for the remainder of the year goes some- thing like this: Stocks could make fresh highs, but the pace of the recent market melt- up isn’t sustainable as things currently working in favor of stocks will be offset, or neutralized, by issues that will worry investors and cap future gains.

After 14 months of stocks trading sideways, Wall Street has some good news. The U. S. economy is picking up. The Federal Reserve has delayed interest rate hikes. Fear levels related to Brit- ain’s vote to exit the European Union are receding. Global central bankers are promising continued support for markets. Oil prices have stabilized, and the U. S. dollar no longer is exhibiting Superman- like strength vs. for- eign currencies. And, from a contrarian standpoint, investor sentiment, while on the upswing, is far from ebullient. But there are concerns. The race for the White House creates uncertainty. There still are risks related to Brexit. Economic weakness persists in most economies around the globe. U. S. stocks are more expensive than long- term averages. And there still are nagging questions as to whether central bank stimulus can continue to prop up stock prices in a world of negative in-

terest rates and subpar growth.

“There are both risks and rewards,” Savita Subramanian, head of U. S. equity and quantitative strategist at Bank of America Merrill Lynch, said recently in a teleconference. A summer pullback can’t be ruled out, she says.

“Economic policy uncertainty tends to chronically increase as you move closer to November in an election year,” Subramanian said, adding “one has to wonder if central bank stimulus will do the same ( bullish) thing for markets as it has done in the past.”

But there’s an offsetting bullish driver: In a low- yield world where investors are in a desperate search for income, roughly six out of 10 stocks in the S& P 500 now sport dividend yields that are bigger than the payout on the 10year Treasury note.

“The paucity of yield is driving ( conservative) investors to pockets of the stock market,” she says.

Kate Moore, chief equity strategist for the Americas at BlackRock, is “modestly constructive” on U. S. stocks. Continuation of the rally must be “earnings driven,” she said. But a “signifi- cant” earnings rebound, driven by stability in the dollar and oil prices coupled with solid consumption growth from consumers, isn’t guaranteed due to economic policy uncertainty.

Investors should expect only small increases for stocks from now until the end of the year, says Omar Aguilar, chief investment officer of equities at Charles Schwab.

The U. S. economy, he says, will be affected by the global slowdown due to the Brexit fallout in Europe and slower growth in China. Still, he sees the earnings recession in the U. S., now a year old, ending and profit growth returning later this year.

“If anything, we will see more volatility in the second half of the year,” Aguilar says.

“If anything, we will see more volatility in the second half of the year.” Omar Aguilar, chief investment officer of equities at Charles Schwab