10/30/2023 Market Strategy
A Detour Need Not a Journey End
Revising our S&P 500 year-end target from 4900 to 4400
Key Takeaways
- With 246 or 49% of the firms in the S&P 500 index having reported third-quarter results so far, the data show earnings up 5.9% from a year ago on back of revenue gains of 2.1%. This week another 165 firms are scheduled to report, with 51 the week following.
- Markets will have a full spate of economic data to parse and digest this week culminating with the nonfarm payrolls report on Friday.
- The 10-Year Treasury yield last week skirted the 5% level on Fed Chair Powell’s comments, which raised concerns within the markets that the Fed could keep rates at current levels or even higher for longer.
- We are revising our year-end price target for the S&P 500 to 4400 from 4900 to reflect the S&P 500’s three-month sell off pushing the benchmark last week to correction levels. We remain constructive on equities.
Mixed Q3 earnings results and cautious guidance among members of the so called “Magnificent Seven” technology and tech-related stocks along with a spike early last week in longer term, market-determined interest rates raised concerns among market participants that the Fed might keep interest rates at current levels or even raise rates somewhat “higher for longer” pushed the S&P 500 and the NASDAQ Composite into “correction” territory (declines of 10% or more from a peak level).
The nearly three-month sell-off in stocks since the end of July has taken the S&P 500 and the NASDAQ respectively lower 10.28% and 11.87% from July 31 through last Friday. It should be noted that both the S&P 500 and the NASDAQ Composite remain respectively higher 7.24% and 20.8% from the start of the year and 15.11% and 21.37% respectively higher from the S&P 500’s 2022 bear market low on October 12 of last year.
With the S&P 500 standing at 4117 as of last Friday our 4900 target is in our view unlikely to be reached by year end given the soured sentiment on equities that has prevailed over the past three months on increased uncertainty as to how long the Federal Reserve will hold rates at current levels (or even raise them further) as headline inflation remains stickier than expected even as core inflation (ex-food and energy) has appeared more responsive to tighter monetary policy.
An increase to already high levels of geopolitical tension since the heinous attack by Hamas on Israel has added to a level of nervousness in the markets stateside and worldwide.
Uncertainty (resolved just last week) as to who would be the next speaker of the House of Representatives added a new level of domestic political dysfunction to be gauged by investors as well and just ahead of the budget deadline coming up in November.
A jump in Q3 GDP stateside as well as the relative health of the labor market, the consumer and businesses as evidenced in economic data and Q3 earnings season thus far appeared to have little effect in stemming the sell-off in stocks and turbulence in the bond market last week.
Where to from here?
We revised our S&P 500 price target to 4900 on August 1 of this year. Our prior target for the S&P 500 for this year had been 4400, which we had initiated on December 12, 2022. At that time we were looking for the S&P 500 to rise some 12% from a closing level of 3934 on December 10.
Our 4400 target was surpassed when the S&P 500 closed above 4400 on June 30th. As a result we raised our target from 4400 to 4900 on August 1 of this year while reducing our earnings projection to $220 from $230.
Our price target of 4900 had assumed that the resilience exhibited by the US economy would continue along with a level of high sensitivity practiced by the Federal Reserve in raising its benchmark rates further to slow the inflation rate towards its 2% target.
When we initiated our 4900 target for the S&P 500 on August 1 we assumed 6–7% upside from where the S&P 500 had closed on the last Friday of July.
Ironically even as economic and corporate earnings resilience have persisted since the end of July, market sentiment soured on stocks as market-priced interest rates moved higher and geopolitical risk ramped up. This irony suggests at least in part that much of the recent downside in stocks reflects a market tantrum by highly leveraged players in the market who have to deal with the new paradigm of the end of free money orchestrated by the Fed wherein now bond issuers (and other borrowers) pay for the privilege of borrowing and bond buyers and lenders get something in return in the form of a coupon bearing a realistic and fair yield.
Having experienced more than a few Fed Fund hike cycles since 1983 the recent pullback in stock prices is neither atypical in a process of a Fed funds hike cycle nor should turbulence be unexpected with a significant jump in geopolitical risk.
That said we are aware that what was 6–7% upside to year end for the S&P 500 at the start of August when we last raised our S&P 500 price target to 4900 now near the end of October would imply 19% upside.
Notwithstanding the ability of the bull market that emerged from the lows in October of 2022 to climb a wall of worry—at this late date in 2023 restoring our year-end target of 4,400 which suggests upside potential of around 7% from here to year end seems more realistic and achievable at this juncture. We maintain our earnings projection of $220 for the S&P 500.
We view the three-month corrective occurrence experienced by stocks since August as likely near an end. Valuations have come down substantially across the sectors (see page 11 of this report) and resilience remains the operative word for the US economy. We remain positive on equites and view fixed income as highly complementary for diversification purposes though not broadly competitive with equities over the mid to longer term.
Q3 earnings season, the FOMC meeting and rate decision at mid-week along with a heavy calendar of economic data culminating in the jobs report on Friday will certainly capture investors’ and traders’ attentions this week.
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