Spring May Bring Hope for S&P 500 Investors

by webmaster

As winter arrives, investors eagerly anticipate the arrival of spring, as it may present the first opportunity for the S&P 500 to break out of its current range, if only temporarily.

Since reaching its peak in the summer, there has been ongoing debate about whether the market can recover or if further decline is ahead. Stifel market strategist Barry Bannister suggests that it will likely tread water until at least April.

In a recent note, Bannister adjusted his S&P 500 target to 4,400 by April 2024, extending it from the end of this year. He attributes this adjustment to the pressure on stocks caused by high interest rates. This target is less than 4% above the index’s current trading level.

Given that the yield on the 10-year Treasury note is approaching 5%, many investors consider it more prudent to invest in relatively risk-free U.S. government debt rather than stocks, even though stocks may yield greater returns over the long term. In essence, they prefer a sure thing to a potential gain.

Interestingly, the high interest rates are inconsistent with the S&P 500’s valuation, which has been boosted by the impressive performance of the Big Tech stocks known as the Magnificent Seven: Apple (AAPL), Amazon.com (AMZN), Google parent Alphabet (GOOGL), Facebook parent Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA). The higher interest rates offer investors immediate returns, diminishing the future value of stocks’ earnings.

Apollo Global Management chief economist Torsten Sløk concurs, stating that “tech valuations are very high and inconsistent with the significant rise in long-term interest rates.”

Bannister shares a similar perspective as other market strategists who have voiced concerns about this issue. While he predicts that 10-year Treasury yields will reach their peak at around 5% in this market cycle, he believes that 5% to 6% will be the norm for this decade, which will naturally impede stock valuations.

Overall, while investors anticipate the arrival of spring, they continue to navigate uncertain market conditions and consider how high interest rates may shape the future of the S&P 500.

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The Year Ahead: A Challenging Road for the Stock Market

Bannister, a well-respected analyst, accurately predicted the events that unfolded this year. In his January report, he forecasted that 2023 would be a year of two halves, with an initial rally followed by troubling times. It was in May when he boldly set his year-end target for the S&P 500 at 4,400, emphasizing the dominance of tech stocks in the market.

Bulls in the market have been pointing to the ongoing strength in the labor market as evidence of a thriving economy and a catalyst for the rally. However, experts closely monitoring the Federal Reserve have noted that it is unlikely for interest rates to drop, as Chairman Jerome Powell stated in his recent remarks. Tom Essaye from Sevens Reports concurred, stating that “the main takeaway from Powell’s speech was that in this situation, there’s no way the Fed can get dovish.”

Consequently, Bannister sheds light on the paradoxical nature of good news in the current economic context. While a tight labor market implies economic resilience, it also becomes a catalyst for the normalization of Fed rates. This normalization subsequently tightens U.S. financial conditions and weighs on price-to-earnings ratios.

Naturally, if higher rates are to have a detrimental impact on stocks as Bannister suggests, it indicates a challenging path ahead for the market. In fact, Bannister firmly concludes that the S&P 500 is likely to experience a flat or widely rangebound performance throughout the 2020s decade.

Bannister predicts that by 2030, the S&P 500 earnings per share will at least double from $156 in 2019 (pre-Covid) to $300 to $325. However, he anticipates that the index’s price/earnings multiple will approximately halve, effectively keeping the overall index relatively stable.

While there is a possibility of a market uptick in the spring, it should not be mistaken as a return to prosperous times.

Unsettling thoughts for the upcoming spooky season.

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