After a stellar 2023, the stock market has continued to ignore the impact of persistent inflation and higher interest rates. this year. The S&P 500 is up more than 12% so far this year to hit an all-time high, surpassing the average annual gain of about 10% in the blue-chip index since 1957 in less than six months. A strong first-quarter earnings season and a resilient economy have underpinned stocks' success, but some of Wall Street's top strategists still fear a slowdown is looming.
In a note on Tuesday, Stifel chief equity strategist Barry Bannister said he expects the S&P 500 to fall about 10% to 4,750 by the end of the summer. The Wall Street veteran, who argued in 2023 that stock market returns could be flat for a decadewhen adjusted for inflation, he cited three main reasons for his bearish outlook.
The first, perhaps unsurprisingly, was “hard” inflation. Bannister has been warning for months that he believes the Federal Reserve has already “harvested” all the disinflation that normally accompanies a recession over a five-quarter period.pseudo-recession" which ended in the second quarter of 2023. In May, he even argued that this means that Fed officials' goal of returning inflation to 2% is nothing more than a "castles in the air.”
Bannister fears that heavy spending on services, along with rising health care, financial and insurance costs, will lead to persistent inflation in that key sector of the economy. Add to that higher-than-previously forecast housing inflation, a slowing rate of productivity growth and persistent wage growth, and you have a recipe for a “moderate form of stagflation,” he says.
This outlook for low growth and moderate inflation could reduce the S&P 500's price-to-earnings ratio (a metric used to value the index) by 500 points, the strategist warned, as investors account for lower potential revenue growth and higher costs. .
After stocks surge this year, the S&P 500 trades at just over 23 times earnings, according to he Wall Street Journal. That's a lot compared to the historical average of 19.4 times earnings.
Bannister is not the only one sounding the alarm following the recent rise in the stock market. Wells Fargo strategy guru Scott Wren told investors to "buckle up for increased volatility" in his Wednesday note. "There are a number of potential issues that could cause volatility in financial markets in the coming months," the senior global market strategist wrote.
Wren, like Bannister, cited the timing of the Federal Reserve's interest rate cuts as a possible trigger for a market pullback. After projecting three interest rate cuts this year in March, Fed economists are likely to plan just one or two cuts at the June Federal Open Market Committee (FOMC) meeting, according to Wren. This could spell trouble for stocks, as many investors are still expecting multiple (typically) interest rate cuts to hit the market this year.
“Will the old market bromide 'sell in May and disappear' work this year? That remains to be seen, but we do not expect the [S&P 500] "Gain a significant lead here through the end of the year," Wren wrote.
He Wells Fargo The strategist also warned that high food and energy prices will continue to weigh on consumer confidence, and that the US elections are likely to bring volatility to markets. He recommended investors look for larger, so-called “quality” companies, those with strong balance sheets, low debt and solid profitability, in sectors such as industrials, materials, energy and healthcare that are outside the highly technological space. valued.
Similarly, Stifel's Bannister recommended sticking with "quality" stocks in so-called "defensive value industries" that are often more stable, including the healthcare, consumer staples and utilities sectors.
While both strategists see potential headwinds for markets ahead, it's not all bad news. Wells Fargo's Wren concluded with some words of wisdom that every investor should remember from time to time: “The downsides of stocks, if we see them, can offer opportunities. Be prepared. Have a plan. Seat belt."
