Investors are doubling down on stocks, shaking off fears of an economic slowdown in the U.S. which caused a sell-off earlier this month. Global stock markets fell sharply in early August after a rise in unemployment sparked fears that U.S. economic growth could slow more than expected. It led a number of investment banks to hike their expectations of a recession, with JPMorgan raising the probability to 35% by year-end. A string of positive data points since then have pushed markets firmly back into the green, however, and investors have laid out three key reasons they’re bullish on equities looking ahead. Cash balances “The fundamental drivers of equity performance are in place,” Vince Lorusso, fund manager and chief executive of Clough Capital, told CNBC’s “Squawk Box Europe” on Monday. “We’re very constructive on equities. We’re really excited about some of the investment opportunities that we’re finding.” Lorusso said investors should be positioned in technology and AI stocks as these companies have “a lot of cash on the balance sheet. They’re generating a lot of cash.” Indeed, according to FactSet data, the so-called Magnificent Seven of Big Tech stocks collectively reported 8.5% growth in cash reserves last quarter, to $456 billion compared to a year ago. This financial strength provides a buffer against economic headwinds and offers potential for growth and shareholder returns. For Lorusso, this corporate financial health is a key factor supporting equity valuations despite some lackluster economic data points. “We really do like technology and AI. It’s because of their potential to grow revenues, obviously, but they’re [also] already generating significant free cash flow,” Lorusso explained. Resilient economy Adding to this optimistic view, Neil Shearing, chief economist at Capital Economics, said that broader economic data “doesn’t suggest that America’s labor market is cracking.” Shearing pointed to the dip in initial jobless claims for two weeks in a row since the stock market sell-off as signs of economic resilience. “Even the perma-bears would have struggled to find much in the slew of data released over the past week that would justify recent recession fears,” Shearing said in a note to clients on August 19. Over the weekend, Goldman Sachs cut its probability forecast for a U.S. recession to 20% shortly after raising it to 25%. Striking a bullish tone, Capital Economics expects the S & P 500 to reach 6,000 by year-end and 7,000 next year, 8% and 26% above current levels, respectively. Strong retail sales data and robust earnings from consumer staples giants like Walmart in recent days also indicate a resilient U.S. consumer. The supermarket giant reported a rise in same-store sales after six quarters of declining growth, suggesting the slowdown may have bottomed. Interest rate cuts Historically, the Federal Reserve has cut interest rates only after the economy slows significantly. But investors say this time it’s different. If the U.S. central bank cuts rates by 25 basis points in September, as expected, it will be because of falling inflation, not a lack of growth. “It’s not so much that the economy’s in a dire position that [Fed chair] Powell’s going to be cutting, but it’s because as inflation falls, the current Federal Funds rate gets more restrictive, and that’s the reason the cuts are coming,” Patrick Armstrong, chief investment officer at Plurimi Wealth. “That’s a healthy reason to be cutting, so I think that creates a supportive backdrop.” However, despite all the optimism, stock market investors will likely face a bumpy ride up, according to investment bank UBS. The bank believes a rate cut is likely to relieve pressures that have built up in the economy, but it could take some months to be felt. “While we do remain generally bullish, we don’t see a straight line up in the market, as the economy is slowing and there will likely be a mix of conflicting economic data points over the coming months, which is set to continue this recessionary debate,” said Greg Marcus, managing director at UBS Private Wealth Management. “Our view is that the economy is slowing, but not fast enough to enter recession territory.” — CNBC’s Fred Imbert, Jeff Cox and Melissa Repko contributed reporting.
