The stock market is not yet giving the all-clear for a breakout rally, the Wells Fargo Institute warns

Published: February 9, 2023 at 5:33 pm ET

According to strategists at the Wells Fargo Investment Institute, investors should brace themselves for the S&P 500 Index SPX to continue to oscillate in the 3,700-4,300 range, as it has for more than a year.

Technology stocks could be in for a big boost early in 2023, as the Nasdaq Composite Index COMP is up almost 12.6% year-on-year through Thursday, even with this week’s pullback.

But…

Investors should tune in to the S&P 500 Index

SPX

continues to fluctuate in the 3,700 to 4,300 range as it has for more than a year, according to strategists at the Wells Fargo Investment Institute.

Technology stocks could be in for a big boost as 2023 kicks off with the Nasdaq Composite Index

COMP

up nearly 12.6% yoy through Thursday, even with this week’s pullback.

But that doesn’t mean investors should hold their breath for a sustained stock market rally, according to a team at the Wells Institute led by global equity strategist Chris Haverland.

While it’s unusual for the S&P 500 to be stuck in around the same range for nearly a year (see chart), the team also said the stock market isn’t yet giving the “all clear” of sustained upward pressure, according to the team.

Instead, they point to an ongoing “disconnect” between the market’s view of where rates are going and what has been outlined by the Federal Reserve.

“The Fed has said the interest rate peak is near, but for a year stock markets have consistently extrapolated this news to mean rate cuts are coming soon,” the team wrote in a note to clients Thursday.

“Peaking inflation only encourages this view among investors. But slowing rate hikes – or even pausing them – is not the same as cutting rates.”

In addition, sharp rate hikes and wage increases “have eroded gains for the S&P 500 index as a whole,” they wrote. But they also think analysts’ earnings expectations are overly optimistic and see a “short and moderate” recession in 2023 as likely, followed by an economic recovery by the end of the year.

“Until that point, our year-end price target for the S&P 500 index remains 4,300-4,500,” they said.

The S&P 500 closed down 0.9% at 4,081.50 on Thursday after shares pared earlier gains. The Dow Jones Industrial Average

DJIA

According to FactSet, the stock closed up 0.7% while the Nasdaq Composite lost 1%.