- The investment strategist that nailed the stock market bottom in mid-June sees reason for turning cautious.
- Truist co-CIO Keith Lerner told Insider that risks are skewed to the downside as the S&P 500 runs into technical resistance.
- "What's holding us back is central bank tightening and that valuations are not that compelling," Lerner said.
Navigating the ups and downs of the stock market is no easy task, especially amid a bear market that has already seen three separate rallies of as much as 10% that ultimately failed and led to lower lows.
In mid-June, Truist Bank co-CIO Keith Lerner told Insider that the stock market presented a rare buying opportunity after the S&P 500 flashed one of the most extreme oversold readings in 30 years when measured by the percentage of stocks above their 50-day moving average.
Now, after a 14% rally in the S&P 500 and a 20% rally in the Nasdaq 100 since mid-June, investors are wondering if this is another head-fake rally or the start of a new, sustainable bull market.
For now, it's probably another head-fake rally as the risk-reward profile of the stock market slightly favors the downside, according to Lerner.
In an interview on Thursday, Lerner told Insider that he sees the S&P 500 consolidating sideways, sandwiched between its rising 50-day moving average and falling 200-day moving average as a likely scenario in the short-term.
At the same time the S&P 500 is running up against technical resistance, valuations are "pretty full" and the Federal Reserve is still expected to continue tightening monetary conditions via interest rate hikes and a reduction in its nearly $9 trillion balance sheet, which is just starting to get underway, Lerner said.
And Friday's strong jobs report only reinforces the idea that the Fed is likely to continue hiking rates for the foreseeable future, despite some interpreting Chairman Jerome Powell's comments at July's FOMC meeting as a potential pivot.
"What's holding us back is central bank tightening and that valuations are not that compelling," Lerner said, adding that ongoing interest rate hikes means the V-shaped recovery in stock prices investors have grown used to in recent years is unlikely to happen this time around.
But Lerner's approach of combining both fundamental and technical analysis in his research process means he's not oblivious to the possibility that resilient corporate earnings and improving economic data could ultimately pave the way for a breakout move higher.
"Where could we be wrong? Really, more than a Fed pivot is that chances of a recession is a lot less than 50% and ultimately doesn't materialize," Lerner said.
Essentially, a successful soft landing by the Fed.
"We sidestep a recession and a lot of the weakness we've seen is really more of a symptom of the unwind of this huge stimulus, and it's still strong growth. I think that's the bull case, that earnings are going to stay much stronger than expected," Lerner said.
On a sector basis, Lerner recently upgraded technology to neutral as it shows signs of a comeback amid easing inflation expectations and a considerable decline in interest rates from their cycle peak reached in June.
"We're looking for more of a digestion period for the big cap tech stocks for an opportunity to upgrade again," Lerner said.
Truist is bullish on the healthcare sector, as it's "an attractive area that has growth and value characteristics and tends to do well in a choppy market environment," Lerner said.
Ultimately, as investors navigate the ongoing volatility in markets, there's no reason to be a hero at current levels betting for a big move higher, according to Lerner.
"For investors who are over allocated to equities relative to their long-term targets, our view is this would be a more reasonable place to trim exposure," Lerner said.