- Stocks could pull back as much as 10% in the second quarter, Deutsche Bank said.
- The pullback will be prompted by a peak in economic growth and a downturn in retail investor inflows as people return to their pre-pandemic routines.
- In the near-term, Deutsche Bank sees stocks continuing to gain.
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Deutsche Bank’s chief global strategist expects stocks to pull back as much as 10% in the second quarter of 2021 as economic growth peaks.
In a Friday note a team of strategists led by Binky Chadha said they expect a “significant market consolidation” between 5%-10% sometime in the second quarter.
“The more front-loaded the impact of the stimulus, and the direct stimulus checks at around a quarter of the new package clearly are one off, the sharper the peak in growth is likely to be,” the strategists said. “The closer this peak in macro growth is to warmer weather (giving retail investors something else to do); and to an increased return to work at the office, the larger we expect the pullback to be.”
In the nearer term, Deutsche Bank expects stocks to continue to go up as investors pile into stocks with new stimulus money. On Monday morning the Dow Jones hit a record high, buoyed by optimism for strong economic growth following President Biden signing the $1.9 trillion stimulus program into law last week.
The strategists also raised their year-end S&P 500 price target to 4100, up from 3950 previously, because they see stocks rallying back after the second quarter pullback. That gives the benchmark index nearly 4% upside from current levels.
But investors should be selective about stocks they choose against this backdrop. Deutsche Bank’s top sectors are energy and financials, while industrials, materials, and cyclical consumers received a “neutral” rating, because these groups have already priced in strong macro growth after outperforming since November.
Meanwhile, returns on mega-cap growth stocks and technology names are likely to remain flat throughout the year, Deutsche Bank added.