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Equity Investors More Optimistic About Stock Market With Recession Views Pushed Out, RBC Says

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Equity investors are showing more optimism about the market outlook for the next six to 12 months, while recession expectations have been pushed out and most are projecting an interest-rate cut as the next move for the Federal Reserve, RBC Capital Markets said.

The March survey of investors led by Lori Calvasina, head of US equity strategy, showed that 71% of respondents expect President Donald Trump to win the White House again in 2020, but there’s “nervousness” around the election, RBC said.

The survey showed 43% are bullish on the equity market outlook over the upcoming period, 33% have neutral stances and 24% are bearish.

“This represents an increase in optimism since our December survey, but we don’t see evidence of euphoria that would cause us to become concerned about a short-term top in the market,” RBC said. “This echoes what we see in other sentiment and positioning indicators for the US equity market, and reinforces our view that there is still some modest upside to stock prices in 2019.”

Views on the economy showed that 38% see a recession in 2021, compared to 30% for 2020 and just 5% who expect the contraction to start this year. Still, the stock market could give back some of its gains from the first quarter of 2019 if the economy doesn’t show signs of emergence from its rough patch in the period, or if signals on the labor market deteriorate, RBC said.

While almost two-thirds of the survey respondents think the next action for the Fed will be a rate cut, RBC said a reduction in 2019 “would be accompanied by a sharp deterioration in the economic backdrop, resulting in further downgrades to S&P 500 earnings expectations and negative reverberations in stock prices.”

Fewer investors see attractive valuations in the stock market, with 24% saying they’re appealing from 38% in December, while nearly half of respondents say they’re fair. China was the top worry for investors, with most expecting a trade deal to be completed either in the current quarter or the next, RBC said.

And while Trump is expected to win re-election, former Vice President Joe Biden — who has yet to declare himself a candidate — is seen as the most stock-market friendly among Democrats, while Massachusetts Senator Elizabeth Warren, who is in the running, is the least. If Democrats took full control of the US government in 2020, investors said health care, financials, energy and tech are the areas of the market most at risk.

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