Despite the recent surge in stocks and the upward revisions of S&P 500 targets, it is essential to approach these developments with caution.
At the beginning of the week, several strategists adjusted their predictions for the S&P 500 index. Citigroup now projects a mid-2024 forecast of 5000, up from 4400, while Piper Sandler increased its forecast to 4825 from 4625.
Even Mike Wilson from Morgan Stanley, known for his pessimistic target implying an 18% decline, acknowledged in his recent note that the market’s rally could be sustained.
A Challenging Week
Coinciding with these revised forecasts, the stock market experienced a tough week, with the S&P 500 dropping by 2.3%, the Dow Jones Industrial Average falling by 1.1%, and the Nasdaq Composite dipping by 2.8%. Notably, the S&P 500 had already risen by 28% since its bear-market low in October. Strategists, taken aback by this massive rally, responded by adjusting their forecasts according to current market conditions.
However, these adjustments should not be viewed negatively. Last week demonstrated that the economy remains resilient but not strong enough to prompt unexpected actions from the Federal Reserve. Although the latest payrolls report indicated that only 187,000 jobs were added in July and earlier months were revised lower, it is important to consider that a smooth landing for the economy is still possible.
Furthermore, earnings have surpassed expectations, particularly evident with Amazon.com’s impressive performance (ticker: AMZN), which surged by 8.3% after its earnings report. This is crucial, given the S&P 500’s premium valuation.
Nonetheless, rushing to purchase stocks after the S&P 500’s remarkable start to the year (its best since 1997) seems unnecessary. It is crucial to recognize that the index remains expensive at just over 19 times 12-month forward earnings, compared to approximately 15 times at the beginning of the rally. Additionally, stocks like Apple (AAPL), which played a significant role in driving the rally, are displaying signs of reaching their peak. This eagerness to buy reeks of desperation and fear of missing out.
While the stock market has soared and Wall Street has raised its S&P 500 targets, it is crucial to exercise caution and not overlook the potential risks and uncertainties that lie ahead in an already expensive market.
Potential Drawdown Looms as Bears Give In
Michael Arone, Chief Investment Strategist at State Street Global Advisors, notes a wave of Fear of Missing Out (FOMO) emerging in the market. “As that happens, I get increasingly more anxious,” he admits. This anxiety is well-founded considering the historical track record of drawdowns during the summer, a traditionally weak period for the market. Looking at a chart that compares the average S&P 500 target to the actual index, it becomes clear that Wall Street forecasts are, at best, a coincidental indicator and, at worst, a lagging one. A prime example can be seen in 2022 when the forecasts peaked right after the market did in January of that year.
Identifying a specific reason for a potential market fall is always tricky. However, last week’s surge in Treasury yields seems to be a contributing factor. The exact cause behind this spike remains uncertain. While some attribute it to Fitch’s downgrade of the U.S. credit rating from AAA to AA+, others believe it’s a result of unexpected massive debt issuance by the Treasury along with robust economic data that prompted market participants to reconsider their growth targets. Higher yields inherently devalue stocks, assuming all other factors remain constant. Yet, as long as they don’t surge too dramatically, it could present an opportunity to purchase stocks at a discount.
Looking ahead to 2024, markets are cautiously optimistic. Wells Fargo reports that 61 S&P 500 companies have raised profit guidance for the second quarter, while only 23 have lowered their outlooks. This positive trend contributes to analysts’ expectations of sales and earnings growth next year.
Doug Bycoff, Chief Investment Officer of the Bycoff Group, emphasizes the market’s focus on 2024 and mentions their readiness to take advantage of a 5% pullback. The strategy is clear: buy during market dips rather than getting swept up in the excitement when everyone else is buying.
In conclusion, while the bears appear to be surrendering, there is still the looming potential for a drawdown. Being aware of historical patterns and cautious of lagging indicators can help investors navigate the market. Additionally, carefully considering economic factors like Treasury yields can present buying opportunities during temporary downturns. Looking ahead to 2024, a promising outlook for sales and earnings growth offers further reason for optimism. Remember, it’s best to remain patient and strategic, buying on dips rather than succumbing to FOMO.