Inflation fears are cooling, paving the way for a huge rally in stocks, Credit Suisse's chief US strategist says
- The market's inflation expectations are dropping, Credit Suisse's Jonathan Golub said.
- The Fed might conclude its rate hikes in the spring, sparking a huge rally in stocks, he said.
Inflation fears are receding, paving the way for the Federal Reserve to cease hiking interest rates in the spring and trigger a massive surge in stocks, Jonathan Golub said in a CNBC interview Monday.
Credit Suisse's chief US equity strategist pointed to the Treasury inflation-protected securities (TIPS) breakeven rate, which measures inflation expectations. The gauge suggests Consumer Price Index (CPI) inflation, which stood at 8.5% in July, will drop below the Fed's 2% target rate by this time next year, he said.
Golub noted that goods inflation peaked in March and has been slowing for six months now. Also, consumers are seeing gas prices fall at the pump, and even food costs are coming down.
"It really is showing up in the data already, and that's a really big potential positive," he said about lower inflation.
Golub also issued a bullish call on stocks. He emphasized that the cost of corporate borrowing is still reasonable despite interest rates climbing, meaning indebted companies won't struggle too much to repay loans.
Moreover, he argued that stocks are trading at relatively attractive price-to-earnings ratios.
"The valuations on the market are somewhere between fair and inexpensive right now, meaning that there's more upside from PE multiples," he said.
The upshot of a brighter inflation outlook and modest equity valuations could be a huge stock-market rally in the first quarter of 2023, according to Golub.
Investors expect Fed Chair Jerome Powell and his colleagues to realize inflation is waning, and promptly signal an end to interest-rate hikes, he said.
"If they do that," he said, "The stock market's really gonna take off."
Golub's latest comments echo his recent warning that the market's inflation expectations were plunging, putting the Fed at risk of choking the economy with its continued rate hikes.
"Why would the Fed unnecessarily drive us into recession, kill several million American jobs, if in fact inflation is heading in the right direction?" he asked.
The Credit Suisse strategist added that the Fed would keep repeating its pledge to do "whatever it takes" to crush inflation, because changing its tune too quickly could light a fire under the economy and send prices skyward again.
Read more: Bank of America says to buy these 5 real estate stocks that will resist inflation and beat earnings forecasts — even as the economy flashes risks of a hard landing or recession
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