BMO Strategist Who Called Stock Rally Is Bracing for Correction

(Bloomberg) — One of few Wall Street forecasters who correctly predicted last year’s stock market rally finds himself in a contrarian position once again. But this time Brian Belski thinks equities are set up for a substantial plunge — just as many of his peers are turning bullish.

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A correction is imminent after stocks have run up too far, too fast on false optimism over how soon the Federal Reserve will dial back interest rates, the BMO Capital Markets chief investment strategist and long-time bull said in an interview. It could come any time, from the next consumer inflation reading to seasonal selling in May, according to Belski. The culprit will be a realization among investors that higher rates are here to stay.

“What if the Fed doesn’t cut at all?” he said. “We’ve reared an entire generation of investors into thinking if interest rates go down, stocks will go up.”

His skepticism comes as the S&P 500 Index heads for its best week of 2024 after the Fed signaled on Wednesday that it’s on track to cut interest rates several times this year. The US equity benchmark notched its 20th closing record since the start of January as traders bet on policy easing as soon as June.

“The Fed has backed itself into the corner,” Belski said. “Now they really, really, really got to get this right.”

To be sure, Belski emphasized that he remains a long-term bull, with his optimism rooted in economic strength and solid corporate earnings. But “on a near term basis, the market needs a breather,” he said.

Of course, timing when a correction will hit is far more difficult than seeing one coming. Belski was not specific on when this would start or how deep a drawdown could be, but indicated history says corrections average around 9.6% and last three months before a recovery. A drop of 5% should be a sign for investors to start buying again, he said, while a drop of 10% or more would be “really bullish.”

The strategist’s year-end target for the S&P 500 stands at 5,100, a level the gauge eclipsed on March 1 and ranks 13th from highest to lowest among predictions by 25 firms tracked by Bloomberg, tied with Deutsche Bank AG and Citigroup Inc. The highest is 5,500 from Societe Generale SA, while the lowest is 3,500 from BCA Research. The S&P 500 topped 5,200 for the first time on Wednesday.

Many of his strategist peers across Wall Street have recently turned bullish, with firms who were conservative in their US stock outlooks last year including SocGen, Goldman Sachs Group Inc., and Piper Sandler & Co. raising their S&P 500 targets. That’s a cause for concern to Belski, who sees FOMO after prognosticators missed out on 2023’s soaring gains.

“It builds credence to our call that a correction is coming, ‘cause no one’s talking about a correction,” he said. “The market is overextended and we’re way overdue traditionally for a correction. It doesn’t mean it has to happen, but I think people are becoming complacent.”

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