- Stocks surged Wednesday and Thursday after the Federal Reserve raised interest rates yet again.
- Investors feel the Fed will take a cautious approach now, which could support economic growth.
- Julian Emanuel of Evercore tells investors to buy oversold growth stocks and sell defensive names.
Stocks took off this week after the Federal Reserve raised interest rates yet again.
Investors had been hoping the Fed would pause rate hikes for a time instead of continuing to raise rates after a couple of unusually large increases. Rising interest rates filter into the economy slowly, and the theory was that a pause would make it less likely the Fed will trigger a recession — assuming a recession hasn’t already happened, which is its own increasingly complicated discussion.
But Julian Emanuel, who leads Evercore’s equity, derivatives and quantitative strategy team and its portfolio strategy team, says the Fed delivered a real sense of relief this week.
“The Fed chair effectively reduced the medium term tail risks of ‘assuring’ a recession to crush inflation,” he wrote in a recent note. “Equally as important, though, is Powell’s recognition of the danger of doing too much as well as too little, reducing the risk of having to cut rates should recession storm clouds intensify with inflation still at unacceptably high levels.”
That means investors are going to react to the events of the moment. If inflation cools off more than expected, stocks should rally, he said. When companies inevitably reduce their guidance as the economy weakens, they’re more likely to sell.
For his part, Emanuel thinks at least one more big sell-off is coming after this round of buying fades away.
“This is a Bear Market rally, implying likely a lower low this year or next (SPX 3,636) before the Bear ends. Based on the history of prior Bear market rallies upside to 4,200 is possible before a September slump,” he wrote.
In broad terms, Emanuel thinks that some of the growth stocks that have been crushed as investors anticipated the effects of higher interest rates now look somewhat cheap and are poised for a recovery. Meanwhile, some of the more defensive investments that have outperformed lately are overpriced, in his view.
That’s why he recommends selling the following names, which have a notable concentration in defensive areas, especially consumer staples and banks: Philip Morris, Keurig Dr. Pepper, Church & Dwight, J.M. Smucker, Hormel Foods, Kimberly-Clark, and Kellogg, as well as Aflac, Allstate, and Erie Indemnity.
Emanuel’s favorite stock picks right now are below, ranked from lowest to highest based on how far their price-to-earnings ratios have fallen since the end of November, when investors recognized that the Fed was getting more hawkish.
The price-to-earnings changes were calculated as of July 27, while stock performance data is current as of July 28.
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