According to John Canavan, lead U.S. analyst at Oxford Economics, investors shouldn’t get too carried away if the S&P 500 index surpasses the 4,500 mark. Despite recent positive market trends, a U.S. recession still looms on the horizon.
On Wednesday, bond yields retreated, stocks rallied, and the dollar reached its lowest level since April 2022 after U.S. consumer prices cooled more than expected in June. This development has fueled hopes that the Federal Reserve will soon conclude its rate-hiking cycle.
Canavan expressed optimism that the Fed’s efforts to strike a balance between supporting the U.S. economy and curbing high inflation through higher interest rates could propel the S&P 500 above 4,500 in the coming months. However, he believes that an economic slowdown later this year will hinder the index from returning to its record high achieved in 2022. Furthermore, he predicts that the stock market will experience decline later in 2023 and struggle to make significant gains in the next decade.
As of Wednesday, the S&P 500 closed at 4,472.16—a 0.7% gain and its highest finish since April 8, 2022. The index currently stands about 6.8% below its record finish of 4,796.56 on January 3, 2022.
To put matters into perspective, the Dow Jones Industrial Average concluded Wednesday approximately 6.7% below its record close on January 4, 2022, while the Nasdaq Composite Index finished around 13.3% off its record close on November 19, 2021.
Canavan warns that if the U.S. enters a recession, the S&P 500 could drop significantly and potentially test the 50% retracement of its rally since October—currently hovering slightly below 4,000. In fact, the index hit a one-year low of 3,577.03 on October 12, 2022.
Ultimately, while the recent inflation report has provided some relief for investors, the future of the S&P 500 remains uncertain.