The Stock Market Could Struggle This Fall, Strategists Say. Buy

On Sep 4, 2021

What a year this has been for the markets! Fueled by a torrent of monetary and fiscal stimulus, economic and earnings growth, and (until recently) a mostly receding pandemic, the

S&P 500

stock index has rallied 20%, notching seven straight months of gains and more than 50 highs along the way. And that’s on top of last year’s 68% rebound from the market’s March 2020 lows.

Tailwinds remain in place, but headwinds now loom that could slow stocks’ advance. Stimulus spending has peaked, and economic and corporate-earnings growth are likely to decelerate through the end of the year. What’s more, the Federal Reserve has all but promised to start tapering its bond buying in coming months, and the Biden administration has proposed hiking corporate and personal tax rates. None of this is apt to sit well with holders of increasingly pricey shares.

In other words, brace for a volatile fall in which conflicting forces buffet stocks, bonds, and investors. “The everything rally is behind us,” says Saira Malik, chief investment officer of global equities at Nuveen. “It’s not going to be a sharply rising economic tide that lifts all boats from here.”

That’s the general consensus among the six market strategists and chief investment officers whom Barron’s recently consulted. All see the S&P 500 ending the year near Thursday’s close of 4536. Their average target: 4585.

Next year’s gains look muted, as well, relative to recent trends. The group expects the S&P 500 to tack on another 6% in 2022, rising to about 4800.

With stocks trading for about 21 times the coming year’s expected earnings, bonds yielding little, and cash yielding less than nothing after accounting for inflation, investors face tough asset-allocation decisions. In place of the “everything rally,” which lifted fast-growing tech stocks, no-growth meme stocks, and the Dogecoins of the digital world, our market watchers recommend focusing on “quality” investments. In equities, that means shares of businesses with solid balance sheets, expanding profit margins, and ample and recurring free cash flow. Even if the averages do little in coming months, these stocks are likely to shine.

The stock market’s massive rally in the past year was a gift of sorts from the Federal Reserve, which flooded the financial system with money to stave off the economic damage wrought by the Covid pandemic. Since March 2020, the U.S. central bank has been buying a combined $120 billion a month of U.S. Treasuries and mortgage-backed securities, while keeping its benchmark federal-funds rate target at 0% to 0.25%. These moves have…