Stocks just had their best first quarter in five years. According to strategists, this is the direction of the market

By | March 30, 2024

Shares rose higher in the first three months of the year amid investor expectations The US economy is still on solid footing.

Now is the main debate on Wall Street heading into the second quarter whether the S&P 500 (^GSPC) has any more room to run after the best start to a year since 2019.

The market The rally has broadened in recent months, from a story of a few stocks pushing the major averages higher, to investors piling into sectors sensitive to economic shifts, such as basic materials (XLB) and industrials (XLI). The prevailing expectation is that the US economy will continue to grow as inflation moves closer to the Fed’s 2% target, a so-called soft landing scenario.

But some think the market could expect a pullback after five straight positive months for the S&P.

“You made this strong move… in anticipation of, let’s call it a Goldilocks or a soft landing,” said Scott Chronert, Citi’s U.S. equity strategist. “And so we think we should expect a digestion period here to digest these gains and allow some time for the fundamentals to feed into the price action.”

Chronert has a call of 5,100 on the S&P 500 and has not adjusted that forecast higher as his team awaits more confirmation that economic growth remains resilient and that profits will come in better than currently priced in the market.

Goldman Sachs’ equity strategy team is in a similar position, maintaining a year-end target of 5,200 for the S&P 500. But given the stock’s rise above their current target, the team recently explored four other scenarios for the benchmark in a research note.

The two negative cases explore similar topics to those often referenced by the persistent bears on the street. First, market expectations for gains in large-cap tech are too optimistic, and that’s dragging down the entire market. The other is that the Federal Reserve’s fight against inflation leads to an interest rate strategy that ultimately stunts economic growth and causes a recession.

Both negative scenarios would result in the S&P 500 reaching 4,500, according to Goldman’s estimates. And some on Wall Street believe this downside scenario is the most likely outcome.

That group is wary of the recent bumpy inflation numbers and how they could change expectations for Fed rate cuts later this year.

“We believe there is a risk that the story returns from Goldilocks to something like 1970s stagflation, with significant implications for asset allocation,” JPMorgan market strategist Marko Kolanovic wrote in a Feb. 21 note to clients. that the S&P 500 will fall to 4,200 points by the end of the year.

Upside risks

The other two cases examined by Goldman show at least a 10% increase over the benchmark average. One of these would be driven by further outperformance from Big Tech, which would push the sector’s already high valuations even further as AI hype fuels further gains. The other is a continued broadening of the market rally, with gains in the rest of the S&P 500 outside of mega-cap tech and a robust economic outlook supporting a rally in stocks beyond just AI trading.

This would largely be an extension of the current leg of the rally, which has seen Energy (XLE) and Materials lead the sector action in March.

“We remain quite constructive,” said Goldman equity strategist Ben Snider. “And we advise investors to remain invested in the US stock market precisely because we think the upside risks outweigh the downside risks and we think the economy looks very healthy. A recession seems unlikely.”

FILE PHOTO: The Wall Street entrance of the New York Stock Exchange (NYSE) is seen in New York City, US, November 15, 2022. REUTERS/Brendan McDermid/File PhotoFILE PHOTO: The Wall Street entrance of the New York Stock Exchange (NYSE) is seen in New York City, US, November 15, 2022. REUTERS/Brendan McDermid/File Photo

The Wall Street entrance to the New York Stock Exchange is seen in New York City, November 15, 2022. (Brendan McDermid/REUTERS/File Photo) (Reuters/Reuters)

Others on Wall Street share Snider and Goldman’s sentiment. Since Deutsche Bank’s economics team dropped its recession call in early February, the firm’s chief global strategist Binky Chadha has noted that the equity strategy team is more confident this year in its bull case for the S&P 500, which stands at 5,500, roughly 5% higher than the index. current levels.

Research from Deutsche Bank shows that the stock market rally has brought $260 billion into the stock market since May. But these flows are “in line with the macro data,” Chadha said, noting the shift from the consensus expecting a recession to the current outlook for positive economic growth and rising profits.

Deutsche Bank says that too the market’s current appetite for risk is significantly below the level of previous rallies that fell off a cliff, such as the meme stock craze of 2021.

“It’s not [at] a level where you might expect that because the positioning is so stressed that there could just be a relaxation in the middle of the night, for no reason, just because people are so tall,” Chadha said.

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

Click here for the latest stock market news and in-depth analysis, including events that move stocks

Read the latest financial and business news from Yahoo Finance

Leave a Reply

Your email address will not be published. Required fields are marked *