- According to Raymond James, investors should not give up on the stock market just yet.
- The investment firm said the 10% correction in the S&P 500 should turn into a year-end rally.
- Here are five reasons why Raymond James remains bullish on the stock.
It has been a difficult period for stock market investors since the end of July, with the S&P 500 falling 10% in correction territory.
But Larry Adam, chief investment officer at Raymond James, said investors shouldn't give up on the stock just yet, as there could be a rally toward the end of the year and beyond.
"Stock pullbacks are never comfortable, but it's important to put them in perspective," he said in a note to clients on Friday.
Adam has an S&P 500 price target for the end of 2023 and 2024 of 4,400 and 4,650, respectively, representing a potential upside of around 6% and 12% from current levels.
Here are five reasons why Adam expects the stock to do well.
1. The end of the Federal Reserve tightening cycle
"We believe the Federal Reserve's historic tightening cycle is coming to an end (if not already over)," Adam said, even in the face of strong GDP growth of 4.9% in the third quarter.
He highlighted that the underlying PCE indices show a current trend of slowing inflation, which is the Federal Reserve's top priority.
"This should give the Fed peace of mind to pause its monetary policy meeting. [this] week. Given that we expect growth to weaken and the labor market to cool further as we head into the final months of the year, the Fed's job is likely done," Adam said. "If we're on track True, this should bode well for stocks, as the S&P 500 typically gains 14% in the 12 months following the Federal Reserve's last rate hike."
2. Lower interest rates
The macroeconomic factors of a weakening economy and continued disinflation should limit the rise of interest rates in the future and should ultimately lead to interest rates falling, not rising.
"If this happens, it should support an improvement in the multiple, lifting share prices," Adam said.
3. Strong mega-cap tech benefits
S&P 500 Earnings Downturn Will End in Q3, Largely Thanks to the strong results of mega-cap technology companies such as Microsoft, Alphabet and Amazon. But investors don't seem to realize it yet.
"There is an apparent disconnect between the actual results and market performance of several of the mega-cap tech names that reported [last] week. For example, despite posting combined EPS growth of 44% year over year and crushing estimates of ~13% combined, a MAGMAN composite declined 4% over the week and is now 10% off highs recently," Adam said.
MAGMAN refers to the earnings results of microsoft, Amazon, Alphabet, Goaland consensus estimates of Apple and NVIDIA.
"These price movements are inconsistent with fundamentals, and the positive results from these mega-cap names combined with strong financial sector results leave us confident in our 2024 S&P 500 earnings forecast of $220 to $225," Adam said.
4. End of year seasons
Recently, stocks have followed seasonal patterns seen over the past 50 years, namely declining in August, September and October, Adam noted.
"Fortunately for investors, the The seasonal trend will become a tailwind as we enter two of the strongest months of the year. with the S&P 500 rising an average of 1.5% and 1.2% in November and December respectively," he said.
5. Bearish sentiment shows a contrary signal
Investor optimism toward the stock market has "largely evaporated" in recent months, Adam noted, and bearish sentiment in the AAII investor survey jumped to a five-month high. that represents a contrary buy signal.
"The cautious sentiment makes us more optimistic that the market can rally over the next 12 months."
