After a brutal 2022, the market has largely shrugged off various concerns this year. The rally could steam ahead, thanks in part to some stocks that have already led it higher.
For all the worries about the health of the financial sector, the impact of the Federal Reserve's interest-rate increases and the debt ceiling debacle, the S&P 500 is still in the black over the past month, and for the year as well. However narrow the band of winners has been, the index has continued to chug ahead, and may continue to do so for another 6.5%, according to Stifel Market Strategist Barry Bannister.
He lifted his second-/third-quarter target for the S&P 500 to 4,400 on Monday, up from his previous expectation for 4,300, pushing out his concern about a potential recession and bear market to late in the year. That's based on ongoing economic resilience, as evidenced by recent data points, and leads him to believe cyclical stocks are better positioned than defensive ones -- including recent winners.
Between Covid-19 and resulting stimulus spending, among other factors, the events of the past few years have "shredded the concept of what cycles 'should' look like," Bannister writes. "We have to go back to just after WWII (late-1940s) for a similar economic setup, and the result then (as now) may be an S&P 500 trading range in 2023-2024 similar to 1946-1948 for which we are still testing the high side of the range in the current period."
He expects inflation will slow sharply -- if not fall to the very low range of 1% to 2% that dominated the last decade -- and in the post-war decades, the S&P 500 has typically turned higher after year-over-year inflation peaks. Likewise he expects the ISM PMI Manufacturing index rising in the second and third quarters, a trend that has also historically led higher the economy and S&P 500's earnings per share.
That's good news, given that the market doesn't necessarily "need strong earnings per share [it] just needs to avoid an earnings-per-share recession and the PMI hints at 2023 recession avoidance," Bannister writes.
That combination of stronger earnings and moderate inflation plus real growth would tend to favor both growth stocks -- like the tech hardware and equipment maker Apple, and Amazon.com's $(AMZN)$ heavy retailing industry -- along with cyclical value stocks, spanning industries from basic materials to diversified financials.
Those bets have already in large part been winners of course, as investors move away from the safe-haven plays that dominated 2022, to names like those in Big Tech that have done so much to fuel 2023's rally. Big tech may not be infallible, but it also doesn't seem poised for a drastic reversal, and other 2022 cyclical losers, like consumer discretionary stocks, have also rebounded ahead of the broader market.
Nonetheless, Bannister thinks investors shouldn't get too carried away by recent market strength, writing that "by late 2023 we may be more concerned," given factors like moderating employment and the historical lag between the steepening of the yield curve, which began again in March and a recession. Many other industry watchers have also warned of a late-year selloff.
Still, the arrival of any recession has been continually pushed back this year, so that by the end of 2023, debates about whether it's tardy or nonexistent may become fodder for 2024 predictions.
Comments