Stock prices have risen sharply and Wall Street is raising its S&P 500 targets. Please do your best to ignore them.
The week started with a number of strategists upgrading their forecasts for the year
S&P 500 index.
Citigroup raised its mid-2024 guidance to 5,000 from 4,400, while Piper Sandler raised it to 4,825 from 4,625.
Even Morgan Stanley’s Mike Wilson, who is targeting a worst-case scenario of an 18% decline, conceded in his note last week that the market recovery could be sustainable.
It’s probably no coincidence that the stock market had a difficult week, with the S&P 500 falling 2.3%
Dow Jones Industrial Average
fall by 1.1%, and the
Nasdaq Composite
Decrease of 2.8%. After all, the S&P 500 started the week up 28% from its October bear market low, and strategists, many surprised by the massive rally, responded by acknowledging what had already happened and throwing their predictions to the market brought.
Not that there’s anything wrong with that. If we’ve learned anything over the past week, it’s that the economy remains resilient, but not strong enough to force the Federal Reserve to do anything unexpected. According to the latest Payroll Report, just 187,000 new jobs were added in the US in July and earlier months have been revised down. Consider this another sign that a soft landing is still possible.
Gains were also stronger-than-expected – notable among them was Amazon.com (ticker: AMZN), which rose 8.3% after its report – which was especially important given the S&P 500’s premium rating.
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But after the S&P 500 posted its best performance since 1997 for the first seven months of the year, it feels unnecessary to rush into buying. That doesn’t change the fact that the index is still expensive at just over 19x 12-month forward earnings, versus about 15x at the start of the rally, or that stocks like Apple (AAPL), the helped propel the rally The rally is showing signs of reaching the benchmark. It all smells of desperation and the fear of missing out.
“The bears are finally throwing in the towel and we’re seeing some examples of FOMO now,” said Michael Arone, chief investment strategist at State Street Global Advisors. “When that happens, I get more and more anxious.”
Arone warns of a possible drawdown. History backs it up – and not just because it’s summer, a historically weak time for the market. A quick look at a chart of the average S&P 500 target overlaid on top of the index itself shows that Wall Street forecasts are a random indicator at best and a lagging indicator at worst. In 2022, for example, they peaked just after the market peaked in January of that year.
Of course, the market always needs a reason to decline, and over the past week it has found it in rising government bond yields. It’s hard to say what exactly made her pop. Though some blamed Fitch’s downgrade of US credit ratings from AAA to AA+, it’s more likely a combination of massive issuance — the Treasury Department said it plans to issue more bonds than expected — and solid economic data , which forced market participants to reconsider their growth goals. Higher returns make stocks worth less, other things being equal. However, as long as they do not rise too much, this could represent a buying opportunity.
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This is especially true as markets look to 2024. According to Wells Fargo, about 61 S&P 500 companies that reported second-quarter earnings raised their earnings guidance Tuesday, while 23 lowered their guidance. This is another reason why analysts assume that sales and profits will increase next year.
“The market is looking to 2024,” said Doug Bycoff, chief investment officer of the Bycoff Group. “If there’s a 5% drop, we’ll be waiting to strike.”
In other words, don’t buy when everyone is excited, buy when prices are down.
write to Jacob Sonenshine at [email protected]
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