Stocks experienced their strongest first quarter in five years – Analysts share their predictions for the market’s future direction

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Stocks experienced their strongest first quarter in five years – Analysts share their predictions for the market’s future direction

Actions ripped higher during the first three months of the year, amid bets from investors who the American economy remains on solid footing.

Now the key debate on Wall Street heading into the second quarter is if the S&P 500 (^GSPC) still has room to operate after its best start to the year since 2019.

The market rally has expanded over the last few months, moving from a story of a few stocks push major averages higher to investors crowding into sectors sensitive to economic changes like the materials (XLB) and industrial (XLII). The dominant bet is that the U.S. economy will continue to grow as inflation approaches the Fed’s 2% target, a so-called soft landing scenario.

But some believe that after five consecutive positive months for the S&P, the market could see a decline.

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

Chronert holds a 5,100 call on the S&P 500 and has not changed this forecast higher as his team awaits further confirmation that economic growth remains resilient and earnings will be better than those currently priced in by 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 stocks rising beyond their current target, the team recently explored four other scenarios for the benchmark in a research note.

The two negative cases explore topics similar to those often brought up by the persistent bears of the street. The first is where market expectations regarding profits in large cap technology are too optimistic, causing the entire market to fall. The other is that the Federal Reserve’s fight against inflation leads to a strategy of higher and longer interest rates that ultimately stunts economic growth and causes a recession.

Both negative scenarios would lead the S&P 500 to reach 4,500, according to Goldman estimates. And some on Wall Street believe the bearish scenario is the most likely outcome.

This group is be wary of recent erratic inflation figures And how this could change expectations in favor of a Fed interest rate cut later this year.

“We believe there is a risk that the Goldilocks narrative returns to something like the stagflation of the 1970s, with significant implications for asset allocation,” wrote Marko Kolanovic, chief investment strategist. JPMorgan markets, in a note to clients on February 21. for the S&P 500 fall to 4,200 by the end of the year.

Upside risks

The other two cases examined by Goldman see an upside of at least 10% compared to the benchmark average. One would be due to further outperformance by Big Tech, which would see already high valuations in this sector. more inflation as AI hype generates new gains. The other is a continued broadening of the market rally, with rising earnings from the rest of the S&P 500 outside of mega-cap tech and a strong economic outlook supporting a rally in stocks not just tied to AI trading.

This would largely be an extension of the current stage of the rallywho saw the Energy (XLE) and materials lead sector action in March.

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

Stocks experienced their strongest first quarter in five years – Analysts share their predictions for the market’s future direction

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

Others on Wall Street share Snider and Goldman’s sentiment. Since Deutsche Bank’s economic team abandoned his call for recession in early FebruaryBinky Chadha, the firm’s chief global strategist, noted that the equity strategy team feels more confident in its bullish case for the S&P 500 this year, which sits at 5,500, up about 5%. compared to current levels.

Research from Deutsche Bank shows that rising stocks have brought $260 billion into the stock market since May. But these flows are “consistent with the macro data,” Chadha said, highlighting the shift from a consensus of a recession to the current outlook for positive economic growth and rising profits.

Deutsche Bank also says The current risk appetite in the market sits significantly below levels seen during previous rallies that fell off a cliff, like the meme stock craze of 2021.

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

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

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