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Veteran fund manager who correctly anticipated the outlook for stock downgrades

The stock market rallied in the first 6 1/2 months of 2024, with the S&P 500 hitting 38-session highs before stalling.

It fell 3% to 5,494 from a record high on July 16.

The outlook for stocks going forward is murky, and August’s consumer inflation report didn’t make things any clearer. The consumer price index rose 2.5% year-on-year, the lowest since February 2021.

Veteran fund manager who correctly anticipated the outlook for stock downgrades
The stock market has come down from record highs in recent weeks.

But excluding food and energy prices, the index rose 3.2 percent, unchanged from July. The Fed has a 2% target for inflation, but that’s based on a different gauge.

In any case, most experts agreed after the report that the Fed will cut interest rates by 0.25 percentage points at next week’s meeting. Some had earlier forecast a half-point cut.

So what does a 0.25 percentage point rate cut mean for equities? The optimistic idea is that this move will stimulate the economy and therefore boost corporate earnings.

The downside view is that a rate cut signals that the economy is weakening, which is bad for earnings.

What happens to corporate earnings

Let’s take a look at the profit picture. Earnings per share for the S&P 500 rose 11.3% in the second quarter from a year earlier, the most since the fourth quarter of 2021, according to FactSet.

Related: Veteran fund manager finds Warren Buffett’s moves worrisome

Analysts are forecasting a 4.9% rise in earnings for the third quarter, which isn’t bad considering the strong second quarter. But some experts say the slowing economy will prevent such a strong showing.

And in any case, many experts argue that the market is overvalued. As of Sept. 6, the S&P 500 traded at 20.6 times analysts’ earnings estimates for the next 12 months, according to FactSet. That’s above the five-year average of 19.4 and the 10-year average of 18.

Bears also cite September’s effect on stocks. The moon often brings bad news for investors. The S&P 500 has fallen an average of 1.2 percent in September since 1928, according to Dow Jones Market Data.

This is the worst monthly performance on the calendar. The index has stumbled 56% since September.

Related: Top Research Firm Unveils Stock Market Forecast for Q4

Doug Kass is a little bullish on stocks

TheStreet Pro columnist Doug Kass has been bearish for months. He has worked as a hedge fund manager since the 1970s, including a stint as director of research for legendary investor Leon Cooperman’s Omega Advisors.

The recent weakness in many stocks makes some of them attractive buying candidates, Kass wrote in his Sept. 11 column.

“Many stocks have been ignored by investors and have underperformed the averages,” he said. “This is fertile ground for my long selections.”

His concerns about market fundamentals are slowly being accepted as market consensus, he said. This could be a bullish indicator for stocks. Lower interest rates should also support stocks, Kass said.

The fund manager buys and sells:

  • Cathie Wood rips off $8 million from bad tech stock
  • Top value fund manager says Google parent Alphabet is deep value stock
  • Morgan Stanley reveals top picks, including Nvidia

His earlier concerns reflected the outlook for slowing global economic growth and sticky inflation, massive U.S. debt and high valuations, Kass said. “While I continue to be concerned about equity markets, I am less so now.”

Kass is not tied to a positive or negative view of the market. “As a contrarian — armed with a sense of intrinsic values ​​— I’m willing to buy weakness and sell strength,” he said.

The takeaway from his 9/11 column is that “I fully recognize that stocks outperform any other asset class over long periods of time,” Kass said.

Among his favorite stocks is media/entertainment giant Disney (early) and oil producer Occidental Petroleum (OXY) .

The author owns shares in Disney.

Related: Veteran fund manager sees world of pain coming for stocks

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