Markets Are Getting Harder to Please: Strategists

The stock market is getting harder and harder to please, strategists told CNBC on Wednesday as global stocks fell on profit taking and failed to lift after more better-than-expected corporate earnings results.

"What we are seeing is that it's getting increasingly more difficult to surprise the market and to satiate the market. We've had a good rally and if you look at this quarter, take the U.S. for example, some 80 percent of companies have had an upside surprise to their earnings," Simon Grose-Hodge, director and investment strategist at LGT Bank in Liechtenstein said.

"Nearly beating the estimates isn't enough anymore. Markets want to see more than that. They want to see a really big gain over the estimates and more importantly, it's got to come from the revenue side not the cost-cutting side because that's the period that's going to be sustainable," he added.

Companies' results are beating expectations because of cost-cutting and one-off measures, but their sales are down and that doesn't bode well for their longer-term prospects, Grose-Hodge told CNBC.

"What we really need to see is better profit margins, better sales numbers, which means that the US consumer is coming back," he said.

NYSE Clerks in the 1990's
NYSE Clerks in the 1990's

Market Drivers Will Change

The equity rally can continue but "the drivers will definitely change in the next couple of quarters," Franz Wenzel, senior investment strategist at AXA Investment Managers, said.

"The revenue base is going to become more important and I think we saw that with the earnings season … where all these companies have disappointed on the revenue side," he said.

"We think that the junk rally — which has pushed markets higher throughout this year — will peter out and that the quality stocks — individual quality stocks — will basically take over the lead, or at least the divergence between the junk and the quality stocks will come to an end and the quality stocks will start to catch up," he predicted.

Stocks are cheap, despite the rally that we have seen, Wenzel told CNBC.

"On a forward-looking PE basis, we think that next year's earnings should top 25 percent earnings growth. On that basis, we're talking about 12-14 times multiple — that, from our perspective looks fairly attractive. If we put the bond yield into the equation, that makes equities even more appealing and in essence we think equities still remain cheap," he said.

When interest rates and inflation are low, you should get better multiples on companies, according to the strategists.

You can't go in a straight line up without some corrections, Kit Juckes, chief economist and head of strategy at ECU Group, said. Low interest rates and a weak dollar make stocks attractive, he added.

"As long as interest rates stay here and the economic environment doesn't get worse, the natural trajectory is a bit volatile, frequent corrections, but we will make higher highs," he told CNBC.

Many asset managers did not get on board the current rally but have still done well this year out of the corporate debt market rally, Juckes said.

These managers are now noting that with low yields and spreads, it may be the time to sell bonds and buy equities, and therefore, more people may be getting into the stock market, pushing it up further, added Juckes.

  • Click here to watch the full video with Kit Juckes — Positive on Stocks, Worried About Oil: Strategists