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The recent rise in stocks is a “sucker’s rally,” according to chief investment officer Peter Toogood. The CIO of U.K.-based financial services company Embark Group said he now expects a pullback in U.S. equities, after the S & P 500 rose by 14% since the start of October. Toogood said he is concerned over valuations since U.S. equities tend to trade at a P/E (price-to-earnings) multiple of 20x, but yield on average 5% annually. This compares with European equities which yield 8% or 9% on a P/E of 10x or 11x, he said. .SPX 1Y line “It’s probably been a sucker’s rally for a while, is my best guess,” Toogood said. “You’ve got a nice little bear market bounce in the U.S.” Toogood also warned that the S & P 500 could potentially see big falls in the near term. “It should probably be around 3200-3300,” he said. That’s around a 20% fall from Friday’s close of 4,045. The CIO said he was bearish on U.S. equities since the interest earned on cash had risen above bond yields in recent weeks. The Federal Funds Effective Rate hit 4.57% on Mar. 1 — higher than yields on bonds with a maturity greater than 5 years . However, the premium for carrying the risk of investing in stocks has not risen in tandem, according to Toogood. This means that stocks will have to either become cheaper to compensate for the increased risk, or risk premiums (and bond yields) will have to decline to maintain current share prices. Bond prices — and their yields — also partly reflect future expectations on the rate of inflation. Toogood said concerns around inflation could continue to impact the market since supply chain disruptions haven’t been resolved entirely. “You’ve got full employment … Put it another way, you’ve got inflation still sticky,” Toogood told CNBC’s “Squawk Box Europe.” Consumer prices have fallen from their peaks but remain high, and strategists say we have a “ways to go.” Meanwhile, logistics managers are warning of a persistent source of inflation in the supply chain due to an imbalance between warehouse supply and demand. “I don’t think the supply chains have sorted themselves out particularly and the service sector definitely has supply issues,” Toogood added.
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