Wall Street’s major averages rebounded this week, touching their highest levels in more than a month on Wednesday as technology stocks rose. It has sparked talk of bulls returning to the market, with corporate earnings in early roles largely continuing. But strategists at Goldman Sachs and elsewhere said this week that they do not believe this bear market has bottomed yet, amid fears of a recession and severe inflation. Earnings A key factor in determining the bottom is earnings, according to Sharon Bell, chief European equity strategist at Goldman Sachs. “We don’t see that this bear market is completely over yet,” she told CNBC’s “Squawk Box Europe” on Tuesday. “I think we haven’t yet seen a dip in earnings estimates…Margins are still very high.” And valuations, especially in Europe, “certainly not at the lows you normally see during a bear market, so yes, I think there are downside risks,” she added. Bell said the first half of this year was “very good,” with reasonably strong economic growth, and that even with inflation rising, companies were able to pass some of these additional price increases, she said. “But I think it’s going to get more and more difficult to pass on to consumers and we expect margins to shrink,” Bell said. Analysts expect earnings per share of $226.92 by the end of this year, or one-year growth of 10.5%, and $246 by the end of 2023, or 8.69%, according to FactSet. In a recession scenario, these numbers might look worse. In Europe, earnings fall about 20% to 30% in average recessions, while the average has been about 14% declines for the S&P 500 in the past eight recessions, according to Bell. She said estimates of margins and earnings will come down from here. “So yeah, I think it’s still there [risks] On the downside, Bell said. “We have a little more to go in.” Inflation The second factor in determining whether a bear market has bottomed is peak inflation, according to Goldman. In a June 14 report, Bell noted that general inflation has peaked above 3% in the US 13 times since 1950 – and the S&P 500 has usually fallen in the period before those peaks, and recovered on average after the peaks. “However, the strongest indicator after inflation — peak rallies benefited from at least one of three factors: a sharp reversal in economic growth, lax valuations, and lower rates.” Levels for the next few months before dropping in late autumn. In the UK, they may peak in October. US inflation rose 9.1% in June from a year ago, above estimates and the fastest pace since November 1981. What the Fed is doing matters Wolfe Research expects a bear market rally to be short-lived, saying its bearish base remains intact. “We attribute the recent rebound primarily to investor sentiment (a contrarian indicator) which has bottomed, which has led to a strong rally in stocks in the near term,” she said in a note on Wednesday. In a separate note on Tuesday, Wolfe Research analysts said trading is “likely to remain very choppy,” with more bear market rallies in the coming months. The research house doesn’t see stocks pulling back in the medium term until investors gain more clarity about future moves from the US Federal Reserve. The company said it believes the Fed has two primary options: to tighten policy sharply and provoke a deep recession that “crushes” inflation, or to tighten moderately and cause a milder recession that fails to solve the inflation problem. Most analysts now expect the Fed to raise interest rates by three-quarters of a point this month – not a full percentage point as some discussed last week.
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