Investors are doubling down on stock investments to overcome fears of a U.S. economic slowdown that sparked 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. That prompted a number of investment banks to raise their recession expectations, with JPMorgan raising the probability to 35% by year-end. However, a series of positive data points have since pushed markets firmly back into positive territory, and investors have cited three key reasons why they are optimistic about equities going forward. Cash Balances “The fundamental drivers of equity performance are in place,” Vince Lorusso, fund manager and CEO of Clough Capital, told CNBC’s “Squawk Box Europe” on Monday. “We are very constructive on equities. We’re really excited about some of the investment opportunities we’re finding.” Lorusso said investors should invest in technology and AI stocks because these companies “have a lot of cash on the balance sheet. They generate a lot of cash.” In fact, the so-called “Magnificent Seven” of Big Tech stocks collectively saw cash reserves grow 8.5% year over year to $456 billion last quarter, according to FactSet data. This financial strength provides a buffer against economic headwinds and offers potential for growth and shareholder returns. For Lorusso, this financial health of the companies is a key factor supporting stock valuations despite some lackluster economic data. “We really like technology and AI. That’s obviously because of their potential to increase revenue, but they’re (also) already generating significant free cash flow,” Lorusso explained. Resilient economy Adding to this optimistic view is Neil Shearing, chief economist at Capital Economics, who said broader economic data “doesn’t suggest the American labor market is collapsing.” Shearing pointed to the decline in initial jobless claims for two consecutive weeks since the stock market sell-off as a sign of economic resilience. “Even the perpetual bears would have been hard-pressed to find anything in the deluge of data released last week to justify recent recession fears,” Shearing said in a note to clients on Aug. 19. Over the weekend, Goldman Sachs cut its probability forecast for a U.S. recession to 20%, shortly after raising it to 25%. Capital Economics strikes an optimistic tone, expecting the S&P 500 to hit 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 goods giants like Walmart in recent days also point to a resilient U.S. consumer. The supermarket giant reported a rise in comparable-store sales after six quarters of declining growth, suggesting the slowdown may have bottomed out. Rate cuts In the past, the Federal Reserve has only cut interest rates when the economy has slowed significantly. But investors say this time is different. If the Fed 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 the distress of the economy that is prompting (Fed Chair) Powell to cut, but the fact that the current benchmark interest rate becomes more restrictive as inflation falls, and that’s the reason for the cuts,” said Patrick Armstrong, chief investment officer at Plurimi Wealth. “That’s a good reason for a cut, and I think that creates a supportive backdrop.” Despite all the optimism, however, stocks are likely to face a bumpy ride upwards, according to investment bank UBS. The bank believes a rate cut is likely to ease pressures that have been building in the economy, but it could take several months to be felt. “While we remain optimistic in general, we do not see a straight-line uptrend in the market as the economy slows and there will likely be a mix of conflicting economic data in the coming months, which will continue the recession debate,” said Greg Marcus, managing director of UBS Private Wealth Management. “In our view, the economy is slowing, but not fast enough to enter a recession.” — CNBC’s Fred Imbert, Jeff Cox and Melissa Repko contributed reporting.
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