08/01/2023 Market Strategy
Raising Our Price Target for the End of 2023
We believe opportunities in equities outweigh risks at this time
Key Takeaways
- We are raising our target price for the S&P 500 year-end 2023 to 4900 (from 4400 set on Dec. 12, 2022) while reducing our earnings projection for 2023 to $220 from $230.
- Our price target assumes that the resilience exhibited by the US economy will continue along with a high level of sensitivity by the Federal Reserve in raising its benchmark rates further to slow the inflation rate toward its 2% target.
- Economic data released in July illustrated both economic resilience as well as some vulnerabilities for the economy as the Fed continues its rate hike cycle.
- We discuss our assumptions for our S&P 500 target and company earnings as well as enumerate risks to our target to both the upside and the downside.
We are revising our target price for the S&P 500 by year-end 2023 to $4,900 (from $4,400 set on Dec. 12, 2022), implying a nearly 7% rise above the benchmark’s closing price of 4589 on Monday, July 31, 2023. Our earnings projection of $220 per share for the S&P 500 calls for a P/E multiple of 22.2x, with the potential for that multiple to come down as earnings recover in late 2023 and into 2024.
Our new price target is based on a number of assumptions that include:
- Inflation stateside continuing to trend lower showing that the Federal Reserve’s efforts are having effect in curbing untoward levels of inflation experienced since late 2021 and into mid-year 2022.
- Our appraisal of the market landscape at this time suggests that opportunity outweighs risk as current monetary policy generates a transition from a “free money” environment to an environment with a traditional cost of borrowing.
- The Fed’s rate cycle now appears to be closer to a pause or an end than it has been since March of 2022, with both the CPI headline and CPI core numbers as well as other gauges showing improvement.
- Capitulation by stock market bears on a near wholesale basis of late (on sizable and persistent gains since October last year) suggests that money held on the sidelines may flow into stocks in the months ahead.
Among hurdles met by the equity market this year:
- Job postings and unemployment numbers have shown resilience in the face of the current rate hike cycle.
- The regional bank crisis of confidence in mid-March has so far proven idiosyncratic rather than systemic.
- Sticky inflation levels have been brought down, if not yet to the Fed’s target level.
- A broadening of the rally across S&P 500 sectors suggests that the bull market that emerged from the October 2022 lows has legs to run higher into 2024.
- Earnings growth declines thus far have not been of the magnitude expected by analyst consensus estimates. Some sectors and individual companies have shown unexpected resilience and even strength.
- Evidence of success in corporate cost cutting in a challenging transitional environment point to implementation of technological innovation across sectors that is likely to persist.
- Recent improved performance by US small-cap and mid-cap benchmarks points to a broadening of the rally beyond large cap stocks. Positive performance across market capitalizations points to an economy in recovery moving toward a sustainable economic expansion which could provide further support to the asset class.
- Central banks around the world are following the process of the Fed and (as they did in the financial crisis) using methodologies that follow US policy but are designed for regional needs. This suggests that a broadening of the equity rally could develop across the globe.
- We expect contributions to the economy as the effects of the Chips Act and the US Infrastructure program are felt should help underpin the recovery process and add longevity to the bull market.
- Projected challenges to Social Security would suggest that more investors will look to stocks for potential growth of their retirement assets before, at and in retirement.
Downside risks to our revised 2023 S&P 500 target and earnings projection:
- Geopolitical and global economic risk escalation from policies driven by China and Russia;
- Domestic political risks ahead of the US Presidential election in 2024; • A reversal in the economic progress made thus far notwithstanding 16 months of tighter monetary policy;
- Should the Fed overshoot tightening and drive the economy into more than a shallow recession;
- Negative developments reversing recent improvements in the global supply chain;
- A dramatic and sustainable, broad resurgence in commodity prices; and
- Potential for valuations to becomes a stumbling block to upside should earnings fail to exceed expectations.
Upside risks to our new 2023 S&P 500 target and earnings projection:
- Should the Fed achieve its 2% inflation target sooner than is expected;
- Corporate revenue and earnings growth proves better than current corporate guidance and consensus expectations;
- Commercial real estate proves more resilient to changes in office demand and rising interest rates as prices temper and interest rates stabilize;
- Supply chain dysfunctions that remain lessen substantially as global diversification of input sources gathers momentum; and
- The increase in workers returning to jobs they left earlier this cycle continues as the effects of the inflation cycle cut into personal savings.
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