Barry Bannister, Chief Equity Strategist at Stifel, has revised his S&P 500 target for mid-2024 to 4,650. This represents a modest increase of just over 1% from its current level.
Bannister attributes this projected growth to a shift in market dynamics, with large tech companies relinquishing some of their dominance to cyclical value sectors such as banks, energy, financial services, transport, and insurance.
The Magnificent Seven, which includes Apple, Amazon.com, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla, currently account for over a quarter of the index. As other smaller components make significant gains, the rotation away from these giants will slow down overall progress.
Bannister anticipates this shift to be driven by robust economic growth, inflation, and the Federal Reserve remaining steadfast in its policies.
Contrary to popular belief, Bannister does not expect the Fed to cut interest rates in the first half of the year. He believes that economic indicators will restrain the central bank's actions. In his view, S&P 500 earnings per share will rise year over year in 2024, and unemployment rates are likely to decline in the spring.
Furthermore, Bannister argues that the nation underwent a pseudo-recession between March of last year and this year, where excess labor demand decreased but did not result in job losses. This was concealed by the lingering effects of pandemic-related spending.
As a result, the economy has been in expansion mode since then. However, as the labor market remains imbalanced with more job openings than available workers—particularly in skilled positions—wage growth is expected to surpass the Fed's preferred level. Bannister suggests that the 3% inflation ceiling witnessed in the previous decade may now be the minimum standard for this decade.
Ultimately, Bannister highlights that the trajectory of a potential "double-dip" recession in the second half of 2024 hinges on the actions of the Federal Reserve.
While Bannister voices his concerns amidst the current market euphoria, he is not alone in expressing apprehension, particularly regarding persistent inflation and the possibility of an economic downturn.
The Outlook for Global Economy and Stock Market
Citi's Global Chief Economist, Nathan Sheets, remains cautiously optimistic about the global economy and the stock market. While positive data in 2023 has increased the probability of a soft landing, Sheets emphasizes that the last mile of the inflation fight will still be challenging.
According to Sheets, the stringent monetary policies implemented by central banks and a decrease in consumer demand for services will result in labor market loosening and slower economic growth. He predicts that developed markets, including the U.S., may even experience a recession by mid-2024.
Despite this, Citi believes that the S&P 500 will continue to perform well in the coming years. Although the year-end forecast has not yet been released, Citi expects the index to reach 5,000 by mid-2024, surpassing its previous record high.
Other firms also share this positive sentiment, anticipating gains in the stock market next year. While some argue that there might be some volatility due to a mismatch between investors' expectations and reality, they don't expect significant stock losses. Technical strategists predict that the S&P 500 will eventually break through its prior resistance levels.
However, Stifel's Bannister presents a different perspective. He believes that the S&P 500 will remain rangebound for nearly a decade, as higher interest rates favor more modest value-led returns. Bannister suggests that the 2020s will not resemble the high returns seen in the previous decade.
Although there are bearish voices in the background, many strategists disagree with Bannister's gloomy outlook. Overall, investors are hopeful for continued gains and are skeptical of Bannister's track record.