Trahan, New Equity Strategist at UBS, Is No. 2 S&P 500 Bear
Bloomberg – UBS Group AG’s new head of U.S. equity strategy just added his name to the “bear” column in a big way.
Francois Trahan has made the Swiss bank the second-most-bearish among firms tracked by Bloomberg, proposing a 2,550 year-end forecast for the S&P 500 Index that would mean a drop of more than 9% from Monday’s close. His prediction is exceeded only by Cantor Fitzgerald LP’s Peter Cecchini, who sees 2,500. The median prediction among strategists tracked by Bloomberg is 2,950.
Keith Parker, the previous U.S. head, had projected a level of 2,950 for the end of 2019. Parker has taken on a new role at UBS, focusing on global macro strategy, according to a memo from the bank that was confirmed by a spokeswoman.
While the 15% rebound in the S&P 500 this year is impressive, “we see it more as a ‘risk reversal’ than a trend reversal,” Trahan wrote in a May 13 note.
“Oversold conditions combined with better leading indicators in the first quarter supported a multi-month recovery in stocks,” he said in the note. “A sustainable rebound would require an end to the downtrend in leading economic indicators that has been in place since early 2018 — a development that seems unlikely at this stage.”
Trahan left Cornerstone Macro LLC, the boutique research firm he co-founded in 2013, late last year. He subsequently sued the firm and his former partners, claiming they schemed to “steal Trahan’s multi-million-dollar business through deception and fraud.” He was named to Institutional Investor’s All-America Research Team Hall of Fame in 2016 after taking the top spot in Portfolio Strategy for 10 of the previous 11 years.
Financial markets have yet to fully price in the effects of Federal Reserve tightening, as it takes about 18 months for leading indicators such as equities to reflect Fed policy, Trahan said. Uncertainties include the impact of trade, which is “very difficult to handicap at this point,” and the role of higher rates in a post-zero-rates environment, he said.
Trahan outlined a drop in investors’ risk appetite throughout the year, as preferences tilt toward stocks with low volatility and better visibility. His research favors larger companies, growth over value and stability, he said. Companies that will become more attractive under this framework include Coca-Cola Co., Alphabet Inc. and Merck & Co., he wrote.
Trahan has company with his bearish outlook, particularly given the recent trade turmoil. Morgan Stanley U.S. equity strategist Mike Wilson said the escalation of trade tensions has boosted the chance of a recession, and JPMorgan Chase & Co. strategist John Normand said on Bloomberg TV that stocks could fall another 10% or so.
Trahan’s new target “would leave the index up 2% for the year, an improvement from last year’s 6% decline,” he wrote. “While 2% will sound disappointing to many, it is above the average seen in similar backdrops across history, i.e., the year following an extended Fed tightening cycle.”