Credit Suisse cuts global equities to 'benchmark', trims S&P 500 target

Credit Suisse downgraded global equities to ‘benchmark’ and cut its year-end S&P 500 target to 2,050 from 2,150, having already reduced its equity weightings to the lowest level since December 2008.

The bank said its tactical indicators gave a buy signal on 21 January, which normally leads to a 3-4% bounce, which we have had, but said it was turning more cautious for a number of reasons.

CS pointed to the fact the equity risk premium is at fair value and noted the more complicated macroeconomic environment, with global nominal GDP growth very weak, signs the US labour market is tightening, and the increased risk of a hard landing in China.

A hard landing of the Chinese economy continues to represent the biggest macro risk, according to CS, adding that it is becoming incrementally more concerned about this.

“We believe that the preconditions for a China hard landing have been in place for some time: the third biggest credit bubble (measured in terms of change in credit to GDP), the largest investment bubble (in terms of length of time and magnitude of the investment share of GDP) and one of the largest real estate bubbles (when we look at the proportion of GDP that property represents, the excess inventory and overvaluation on both a house price to wage ratio and rental yield versus mortgage rate basis).”

In addition, it said the Fed appears unusually focused on lagging indicators of activity.

“Clearly, the Fed matters because the dollar is the world's reserve currency at a time when US monetary and financial conditions have both tightened sharply.”

All the bank’s previous concerns remain, such as abnormally high levels of disruption caused by China exporting its excess investment.

Credit Suisse downgraded US earnings per share growth to be flat for 2016.

Still, the bank wasn’t quite ready to go ‘underweight’ just yet, noting that markets outside the US, such as Europe, look cheap.

Credit Suisse said that for markets to stabilise, we would need to see a steadying oil price, clear evidence that it's different in the US this time around – i.e. the savings ratio falls and employment stays robust – China to stabilise capital flight, high yield spreads to narrow or, failing all of this, a Fed response.