07/08/2024 Market Strategy
- July 8, 2024
Want to Take You Higher (Redux)
Economic Resilience this Late in the Fed’s Hike Cycle Suggests to Us that Further Upside Exists for the S&P 500 Stocks
Key Takeaways
- We are increasing our year-end target price for the S&P 500 to $5,900 (from $5,500) and raising our earnings projection to $255 from $250 for the S&P 500 in 2024
- Our upwardly-adjusted price target and earnings projection assume a higher P/E multiple of 23.1x up from 22x with our earlier target.
- Recent economic data that includes: slowing inflation rates, resilient jobs numbers and jobs postings along with Q1 earnings results suggest to us that the current bull market has legs to run higher.
- This week investors will be focused on inflation data for June (CPI on Thursday and PPI on Friday) along with earnings results for several of the big banks on Friday–the unofficial start of Q2 earnings season.
We greet the new week with our second upwardly revision to our price target for the S&P 500 for this year. We’re revising our year-end forecast to 5,900 from 5,500 previously. This is our third price target for year 2024, which began with a 5,200 price target for this year which we initiated last December 11.
S&P 500 earnings results over the most recent three quarterly reporting seasons (Q3 ‘23, Q4 ‘23, and Q1 ‘24) and economic data that has provided evidence of resilience underpinned by the Fed’s mandate-sensitive monetary policy remains at the core of our bullish outlook for stocks.
Now just days past the mid-year point of 2024 we expect the Fed to cut once or twice late in the fourth quarter as a “good faith down payment” for Main Street and Wall Street…
An innovation cycle that could benefit all 11 sectors of the S&P 500 that shows signs of being both cyclical and secular coupled with cross generational demographic needs that suggest a shift in mindset regarding equities that appears driven---not so much by fear and greed but a need to invest for intermediate to longer term goals---adds in our view further support to the case for equities at this time.
When we last tweaked our price target on March 25 of this year after the S&P 500 had closed above our initial 5,200 price target we said that we acknowledged a possibility that we might need to raise our target price again later in the year should our economic and market outlook prove us too conservative in making our projections.
With the S&P 500 closing at its latest record high of 5567.19 our new target of 5,900 suggests the potential of a modest gain of just under 6% from here to year-end taking into account the “usual suspects” of uncertainty tied to economic data and earnings results along with risks in domestic and geopolitics that lie ahead.
When we initiated our price target last December we looked for around 13% upside for the S&P 500 from then to the end of this year on expectations that the Federal Reserve would maintain its sensitive approach in practicing its mandate.
We factored into our thinking the effects of a continuation of the pause mode the Fed had initiated from June 2023 and while expecting some further slowing of the economy we saw less likelihood of a recession as a result of the economic resilience that was so persistent and the sensitivity of the Fed in addressing the stickier than expected inflation that kept its 2% inflation target elusive.
At the end of last year we looked for one or two rate cuts by the Fed (one cut less than the three cuts that the Fed had forecast last December and three or four fewer than what the Fed Fund Futures were pricing at the time).
Now just days past the mid-year point of 2024 we expect the Fed to cut once or twice late in the fourth quarter as a “good faith down payment” for Main Street and Wall Street signaling that the central bank is getting closer to an end of the current rate hike cycle if not quite there yet.
When to cut is the question
We would be surprised if the Fed were to cut interest rates as early as September as more than a few market participants are expecting based on the futures that track Fed funds rate expectations. In our view Jerome Powell and his colleagues want to keep Fed policy clearly independent of politics particularly in a Presidential election year.
At this juncture the biggest surprise for us this year has not been so much the resilience of the economy nor the capitulation of so many market bears but rather the ability the Fed has shown thus far to avoid pushing the economy into recession through 11 rate hikes and eight pauses this rate hike cycle that began in March of 2022---9 FOMC meetings ago). Considering that the Fed has taken us from a Fed Funds interest rate band of 0%- 0.25% to a current band of 5.25%-5.5% we say “so far so good”.
The week ahead
This week will find investors focused on inflation data for June (CPI on Thursday and PPI on Friday) along with the unofficial start to Q2 S&P 500 earnings season when the big banks begin to report results on Friday.
We remain positive on equities and continue to see fixed income securities as complimentary to stocks in providing portfolio diversification. Some near term profit-taking in the day to day action of the market particularly in segments of the market that have had exceptional run-ups since last year into this year should be expected and continues to appear to us quite normal.
Such activity combined with a process of rebalancing and rotation into other segments of the stock market in our view can be healthy and should contribute to the broadening of the markets’ progress that began last year become more evident in the second half of this year.
Economic and market transitions require patience and conviction of investors during periods when markets can churn from day to day as short term traders move in and out of positions and asset classes seeking short term gains.
Near term volatility could in our view continue to present opportunity for investors to “catch babies that get thrown out with the bath water” in periods of market down drafts as the market digests levels of uncertainty that are not uncommon to times of transition in monetary policy like these and in periods of elevated geopolitical risk.
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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