12/11/2023 Market Strategy

John Stoltzfus December 11, 2023

Back to the Future

After nearly a two–year hiatus, the bull appears ready to run in the US through the election year

Key Takeaways

  • We initiate a year-end target price of $5,200 and an earnings projection of $240 for the S&P 500 in 2024. We assume earnings growth of 9% and a P/E multiple of 21.7x.
  • With just two firms left to report Q3 results among the S&P 500, results have been stronger than expected with earnings growth of 4.5% from a year earlier on revenue gains of 1.9%. Before the season began, bottoms-up estimates called for earnings to decline by 0.5% from a year earlier.
  • Eight of the 11 sectors of the S&P 500 are showing positive earnings growth, with four (communication services, consumer discretionary, financials, and information technology) rising at double-digit rates.
  • The S&P 500 closed on Friday at a new high for this year and just 4.2% below its previous all-time high reached on January 3, 2022
abstract financials

Economic data released thus far in the current quarter continues to suggest that the Fed’s efforts to slow the US economy in order to curb inflation continue to make progress. While the Fed’s 2% target remains elusive the lag effect of its tightening efforts are likely to take the inflation rate closer to the target as we get into 2024.

Resilience remains the key operative word going forward as it pertains to economic growth, jobs, the consumer, corporate revenues & earnings even as the Fed remains vigilant. We believe the Fed wants to avoid pushing the economy into a recession.

Our expectations are for the Fed to wait to cut its benchmark rate until at least the second half of next year and perhaps as late as the fourth quarter should inflation prove stickier. Expectations among some market participants for a series of rate cuts in the first half appear too rosy in our view with an interim cut or even an upward tweak in rates more likely to take place before the Fed is finally done with the current benchmark rate hike cycle.

So far this Fed funds hike cycle, the US economy has proven stronger than what has been the Bear camp’s “negative pitch book” from 2022 that was steeped in predictions of imminent recession that have yet to occur and even have evoked comparisons to Waiting for Godot.

We look for 2024 to be a year of transition as markets navigate what we expect will be the Fed’s pivot from a restrictive monetary policy setting to an easier stance.

After 11 rate hikes and 3 “skips” the Fed may well be on pause for longer than many expect. In our view, Jerome Powell is committed to putting untoward levels of inflation in check. He appears to us uninterested in having to follow the path of Paul Volcker who inherited inflation that had become deeply embedded in the American economy and required draconian measures to address it. On the other hand, Mr. Powell appears in no way interested in having his tenure at the Fed being remembered as similar to the tenure of Arthur Burns (Paul Volcker’s predecessor) who failed to curb inflation as Fed Chair.

Since the end of October, stocks have had an extraordinary rally from the lows at the end of October through last Friday. Consider that after a three month correction which took the broad market down some 10.28% the S&P 500 some six weeks later stands up 11.8% from the earlier low and just 4.2% away from the benchmark’s record high of 4796.56 reached on January 3, 2022.

Shortly after that peak Russia invaded Ukraine, which disrupted the global oil and global food supply chains. That was followed that year by the shuttering of major cities in China during a 2022 resurgence of COVID-19 which caused collateral damage to the global supply chain of goods, which further challenged economic growth.

In the same period the US Federal Reserve and other central banks around the world began to pivot to a more aggressive tightening of monetary policy in order to address inflation that had jumped to 40 year highs as a result of crisis period accommodation in monetary and fiscal policy. It was a perfect storm leading to a souring of traders’ and investors’ sentiment towards multiple asset classes pushing stocks and bonds into bear markets.

The bad news? It took time and effort to exit the proverbial woods.

The good news? The efforts of monetary policy officials and resilience of businesses and consumers appear to have countered the negative sentiment that predicted failure versus the challenges at hand.

Keep the party hats in the boxes and right size expectations. It’s no time for complacency or rose colored glasses. We have found in a career that has spanned over forty years that right sized expectations and prudent diversification that meets the needs and tolerances of risk for both private and institutional investors can result in being pleasantly surprised with the results (though of course past performance is no indication or guarantee of future results)

So what about the price target and earnings projection for the S&P 500 in 2024?

We look for 2024 to be a year of transition as markets navigate what we expect will be the Fed’s pivot from a restrictive monetary policy setting to an easier stance. While we still can’t rule out the possibility that the central bank may have to nudge rates slightly higher early in the year if inflation doesn’t continue its downward trend, we expect that by the fourth quarter of 2024 the Fed will be moving to lower rates. Our outlook assumes that the slowing economic growth evident in early data for the fourth quarter for 2023 extends into 2024, further dampening the inflationary pressures that necessitated the Fed’s tight policy.

In our view it’s been quite remarkable that the swift rise in short-term rates didn’t tip the US economy into a recession in 2023 that so many had predicted. Instead, consumption demand as well as business spending on investment items continued to power the economy, in the process creating 2.8 million new jobs in the 12 months through the end of November. That spending power came from personal savings accumulated during the pandemic as well as the government’s bipartisan infrastructure deal that boosted investment spending nationwide.

In 2023 the equity market was led higher by cyclical sectors, and in particular from strong gains in the technology, communications services, and consumer discretionary sectors. We expect those stocks to continue to do well even as gains broaden to other sectors and to small- and mid-cap stocks. We continue to favor US equities while maintaining meaningful exposure to foreign developed and emerging market indexes which should follow progress made in the US.

Against that economic and interest rate backdrop, we expect corporate revenues and earnings to continue to grow over the course of 2024. We expect earnings for the S&P 500 companies to reach $240/ share, about 9% higher than the $220 figure we expect for 2023. Based on our assumption of a P/E multiple of around 21.7x , we initiate our year-end price target for the S&P 500 at $5200, around 13% higher from its closing level on Dec. 8, 2023 and nearly 8.5% above the all-time high (4796.56) for the benchmark recorded on January 3, 2022.

Markets don’t move up in a straight line and setbacks are always likely, but those with patience and perseverance should see gains over the intermediate and long term.

John Stoltzfus headshot
Name:

John Stoltzfus

Title:

Chief Investment Strategist, Oppenheimer Asset Management Inc.

John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.

Hide Bio

DISCLOSURES

Strategist Certification - The author certifies that this investment strategy report accurately states his/her personal views about the subject securities, which are reflected in the substance of this investment report. The author certifies that no part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this investment strategy report.

The strategy provided in this report is provided by Oppenheimer Asset Management Inc., (“OAM”) a registered investment adviser affiliate of Oppenheimer & Co. Inc. (“OPCO”). It reflects analysis of fundamental, macroeconomic and quantitative data to provide investment analysis with respect to U.S. securities markets. The overview in this report is provided for informational purposes and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security or investment advisory services. The report is not intended to provide personal investment advice. The investments discussed in this report may not be suitable for all investors. Investors should use the analysis provided by this report as one input into formulating an investment opinion and should consult with their Financial Advisor. Additional inputs should include, but are not limited to, the review of other strategy reports generated by OAM, its affiliates, and looking at alternate analyses. Securities and other financial instruments that may be discussed in this report or recommended or sold by OPCO or OAM are not insured by the Federal Deposit Insurance Corporation and are not deposits or obligations of any insured depository institution. Investments involve numerous risks including market risk, counterparty default risk and liquidity risk. Securities and other financial investments at times may be difficult to value or sell. The value of financial instruments may fluctuate, and investors may lose their entire principal investment.

Strategist Certification - The author certifies that this strategy report accurately states his/her personal views about the subject matter reflected in the substance of this report. The author certifies that no part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this strategy report.

Potential Conflicts of Interest: Strategic analysts employed by OAM are compensated from revenues generated by the firm. The strategists authoring this piece also contribute to an OAM managed portfolio product that relies on and trades on the information contained herein. The managed portfolio strategy trades frequently, both ahead of and after the publication of this report. OAM generally prohibits any analyst and any member of his or her household from executing trades in the securities of a company that such analyst covers. Additionally, OAM generally prohibits any analyst from serving as an officer, director or advisory board member of a company that such analyst covers. In addition to 1% (or more) ownership positions in covered companies that are required to be specifically disclosed in this report, OPCO may have a long positon of less than 1% or a short position or deals as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon and makes a market in the securities discussed herein. Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest.

Third Party Research Disclosure OAM has a research sharing agreement with OPCO pursuant to which OPCO provides OAM Strategy thought pieces to its institutional and retail customers. OPCO does not guarantee that the information in OAM Strategy reports is accurate, complete or timely, nor does OPCO make any warranties with regard to the strategy product or the results obtained from its use. OPCO has no control over or input with respect to opinions found in OAM strategy pieces. OAM is a registered investment adviser affiliate of OPCO.

This report is issued and approved by Oppenheimer & Co. Inc., a member of all Principal Exchanges, and SIPC. This report is distributed by Oppenheimer & Co. Inc., for informational purposes only, to its institutional and retail investor clients. This report does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable for all types of investors. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of Oppenheimer & Co. Inc. Recipients should consider this report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments. The strategist writing this report is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the report. Before making an investment decision with respect to any security discussed in this report, the recipient should consider whether such investment is appropriate given the recipient's particular investment needs, objectives and financial circumstances. We recommend that investors independently evaluate particular investments and strategies, and encourage investors to seek the advice of a financial advisor. Oppenheimer & Co. Inc. will not treat non-client recipients as its clients solely by virtue of their receiving this report. Past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this report. The price of the securities mentioned in this report and the income they produce may fluctuate and/or be adversely affected by exchange rates, and investors may realize losses on investments in such securities, including the loss of investment principal.

Oppenheimer & Co. Inc. accepts no liability for any loss arising from the use of information contained in this report. All information, opinions and statistical data contained in this report were obtained or derived from public sources believed to be reliable, but Oppenheimer & Co. Inc. does not represent that any such information, opinion or statistical data is accurate or complete and they should not be relied upon as such. All estimates and opinions expressed herein constitute judgments as of the date of this report and are subject to change without notice. Nothing in this report constitutes legal, accounting or tax advice. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation. 

Investment Strategy should not be construed as offering tax advice on the tax consequences of investments. As with any investment having potential tax implications, clients should consult with their own independent tax adviser.

This report may provide addresses of, or contain hyperlinks to, Internet web sites. Oppenheimer & Co. Inc. has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient's convenience and information, and the content of linked third party web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk. The S&P 500 Index is an unmanaged value-weighted index of 500 common stocks that is generally considered representative of the U.S. stock market. The S&P 500 index figures do not reflect any fees, expenses or taxes. This research is distributed in the UK and elsewhere throughout Europe, as third party research by Oppenheimer Europe Ltd, which is authorized and regulated by the Financial Conduct Authority (FCA). This research is for information purposes only and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments. This report is for distribution only to persons who are eligible counterparties or professional clients and is exempt from the general restrictions in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the grounds that it is being distributed in the UK only to persons of a kind described in Article 19(5) (Investment Professionals) and 49(2) High Net Worth companies, unincorporated associations etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. In particular, this material is not for distribution to, and should not be relied upon by, retail clients, as defined under the rules of the FCA. Neither the FCA’s protection rules nor compensation scheme may be applied. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Oppenheimer & Co. Inc. Copyright © Oppenheimer & Co. Inc. 2023.