Asset Management
12/11/2023 Market Strategy
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
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.
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.
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